In the recent decision of CIBC Mortgages Inc. v. Computershare Trust Co. of Canada, Justice Murray of the Ontario Superior Court of Justice decided a priority dispute between three innocent mortgagees, all of whom were the victims of a fraud committed by the mortgagors. In reaching his decision, Justice Murray not only interpreted the relevant sections of the Land Titles Act (“LTA”) relating to fraudulent instruments, but also relied upon the decision of Lawrence v Maple Trust Company, 84 O.R. (3d) 94 (“Lawrence”), and the theory of deferred indefeasibility (the “Theory”). Consequently, the decision will undoubtedly have a significant impact in the area of real estate law as it relates to mortgage fraud and the responsibilities of mortgagees to be cognizant of red flags of fraud when lending money to mortgagors.

The Facts

On November 21, 2008, Computershare loaned $280,801.95 to the mortgagors and secured its interest in the land by registering a charge on the property (the “Computershare Mortgage”).

On August 26, 2009, slightly under a year after the Computershare Mortgage was registered on title, it was discharged without Computershare’s knowledge (the “Discharge”) by unknown individuals who did not possess Computershare’s authority to register any discharge. However, despite the Discharge, the mortgagors continued making mortgage payments to Computershare until January, 2013, at which time the mortgagors’ fraudulent actions were discovered.

Subsequent to the Computershare Mortgage being discharged, the mortgagors obtained a private loan which was secured by a purported “first charge” on the property (the “Private Mortgage”). After obtaining the private loan, the mortgagors then applied for and obtained two additional loans from CIBC and Secure Capital. Although the mortgagors were making payments to Computershare at the time of their loan applications to the private mortgagee, CIBC and Secure Capital, and therefore understood that Computershare was the rightful first mortgagee on the property, the mortgagors concealed this fact from all three parties.

After CIBC and Secure Capital advanced their respective loans, from which the mortgagors used the proceeds to pay off the Private Mortgage, there should have been three mortgages registered on title, being Computershare’s, CIBC’s and Secure Capital’s. However, as a result of the Discharge, only CIBC’s and Secure Capital’s charges appeared on title.

In January 2013, when the mortgagors defaulted on the Computershare Mortgage, as well as the CIBC and Secure Capital mortgages, Computershare discovered the Discharge and filed an application to, inter alia, have the Computershare Mortgage restored as a first charge on title to the property.

Fraudulent Persons and Fraudulent Instruments

There was no doubt as to whether the Discharge was a fraudulent instrument. However, in order to settle the priority dispute between the mortgagees, Justice Murray was required to determine whether the CIBC and Secure Capital mortgages were also fraudulent instruments. If the CIBC and Secure Capital mortgages were not fraudulent instruments, then pursuant to section 78(4) of the LTA they would have been ranked first and second respectively in terms of priority. On the other hand, if it was found that the CIBC and Secure Capital mortgages were both fraudulent instruments, then in accordance with sections 78(4.1) and 78(4.2) of the LTA, the Computershare Mortgage would have been restored as a first charge.

Upon considering the evidence before him, Justice Murray determined that the CIBC and Secure Capital mortgages were indeed fraudulent instruments as defined in the LTA. Although CIBC and Secure Capital argued otherwise, Justice Murray found that the mortgagors were fraudulent persons pursuant to subsection (c) of the definition for “fraudulent person”. The mortgagors were not the owners of the “interest in land” that they conveyed to CIBC and Secure Capital. Instead, the mortgagors had fraudulently discharged the Computershare Mortgage and conveyed to themselves the interest in the property that they knew rightfully belonged to Computershare. The mortgagors then proceeded to transfer the fraudulently obtained interest in the property to CIBC and Secure Capital, which in turn led to Justice Murray’s conclusion that the CIBC and Secure Capital mortgages were fraudulent instruments as the definition of “fraudulent instrument” includes instruments that a fraudulent person purports to transfer to another.

Theory of Deferred Indefeasibility

Pursuant to the Theory, which provides guidance as to how the LTA is to be interpreted, fraudsters are prohibited from taking good title or interest in land as a result of their fraudulent actions. As fraudsters cannot obtain good title or interest, they cannot become true owners and therefore cannot transfer good title or interest in land that is fraudulently obtained to any other party. In turn, in accordance with the Theory and the LTA, although CIBC and Secure Capital did not act in bad faith, their respective mortgage interests in the property were found to be subordinate to that of Computershare’s as they took their respective interests directly from fraudsters who never had a valid interest to convey.

Similar to the Lawrence case, just as Maple Trust, which had taken an invalid mortgage from a fraudster, was found to be the intermediate owner and therefore susceptible to a claim from the true owner of the property, CIBC and Secure Capital were considered the intermediate owners in this situation. Each of CIBC and Secure Capital had an opportunity to avoid the fraud as they were dealing directly with the fraudsters but failed to do so, and instead each took an invalid interest in the property. Therefore, CIBC’s and Secure Capital’s respective interests were vulnerable to that of Computershare’s, who was in a position akin to that of a true owner that was fraudulently deprived of its interest in the property.

The Takeaway

After the Lawrence case was decided, there was some uncertainty as to whether innocent mortgagees who have fraudulently lost their interest in a property could rely on the Theory in the same manner as home owners could. Justice Murray’s decision makes it clear that the Theory applies equally to situations involving mortgagees who have fraudulently lost an interest in a property as it does to situations where home owners have been victimized.

This decision also serves as a stark reminder to mortgagees that while they may not be required to investigate the entire history of past dealings with respect to a particular piece of land, they are nonetheless responsible for conducting thorough due diligence when engaging in lending transactions. While the mirror and curtain principles, along with the insurance principle, remain the pillars of the land titles system, mortgagees cannot simply use their reliance on the register as a mechanism by which to absolve themselves of liability in circumstances where they have received an interest in land from a fraudster. If a mortgagee is dealing with a fraudster who has defrauded a home owner or a previous mortgagee, that mortgagee has the last and best opportunity to avoid the fraud, and if it does not do so it will ultimately bear the consequences associated with being an intermediate owner. Therefore, mortgagees may need to take additional precautions in order to ensure that they are receiving valid charges from mortgagors, and it is imperative that they, and not just their lawyers, be cognizant of red flags of fraud when engaging in loan transactions.

The most interesting aspect of litigation is that every case that goes to court has a winner and a loser. Unlike a corporate deal, for example, where it is in the interests of both parties for a transaction to close, the stakes are much higher in litigation because there is never a way that either party can guarantee a result. This is why such a high percentage of litigation cases ultimately settle before trial – parties simply want their potential risk to be minimized by entering into a final and binding settlement.

Given the fact that so many cases settle, I find it interesting that there is so little written about how litigators and their clients can reach practical settlements. With that in mind, I present:

SHAWN PULVER’S 5 KEYS TO REACHING PRACTICAL SETTLEMENTS:

1. ENGAGE SETTLEMENT

Always attempt to engage settlement discussions before litigation escalates. It always amazes me that parties could litigate for months, and lawyers may never have spoken to each other about a possible resolution. Whether I am Plaintiff or Defendant counsel, I always try to engage the other lawyer early on in the process to see if there is any potential for a resolution. As long as discussions are without prejudice, there is no harm in talking.

2. EARLY MEDIATION

Always mediate early on in the litigation process, when possible, especially if you do not expect any new information to arise from the examinations for discovery. Mediation is now mandatory before trial, so why not try to utilize the process before all of the parties have incurred significant costs?

3. MAINTAIN CIVILITY

Always maintain civility with opposing counsel. This is extremely important. You can still advocate strongly for a client while maintaining a sense of civility with opposing counsel. I have settled many complicated and difficult cases in a much more efficient manner because I was on good terms with the opposing counsel.

Good lawyers are able to advocate strongly for their clients, but at the same time not lose sight of what is in their clients’ best interests, which often times is reaching a commercially reasonable resolution.

4. CHOOSE APPROPRIATE MEDIATOR

Take the time to pick the appropriate mediator. It is important that the parties agree on a mediator that everyone will respect and listen to. If you are litigating a condominium dispute, for example, the parties will respond much better to a mediator with specific condominium experience than someone with a general mediation practice. Parties have been listening to their own lawyers for months, and sometimes a fresh perspective is important.

5. STRATEGIC SCHEDULING

Be strategic when you schedule your mediation. For example, if you are Plaintiff counsel, try to mediate on Fridays. I have seen many cases settle on Friday afternoons when defendants run out of interest in fighting, and would rather go enjoy their weekend. It is a small point, but something that parties do not often think about.

Disclaimer: This article is for information purposes only and should not be considered as legal advice.It is strongly recommended that any prospective entrepreneur consult a lawyer in order to make informed decisions that could involve legal matters.

Buying a business for the first time is probably the most difficult decision you will ever have to make.While business people like to think they make well informed, rational decisions, in reality most of us fall back on what we already think we know; for better or worse.

The purpose of this article is to provide business owners with a preliminary road map so that they may being to focus their attention on key areas of concern before buying a business.

Preliminary Legal Due Diligence

As a prospective buyer, evaluating a franchised business and a franchisor at a preliminary basis is easier (or more accessible) than a non-franchised business.

There are several sources and methods of evaluating the franchise opportunity, including:

Disclosure Documents

The single best source of information about a franchise or franchisor should be the disclosure document, which is required to be prepared and provided under the Arthur Wishart Act (Franchise Disclosure), 2000.In general, the disclosure document will provide written information about the history of the franchise, financial performance and other information important to a prospective franchisee’s decision whether to buy the franchise.

Franchisees of the Franchisor

Information about the franchisor’s support, commitment, integrity, business acumen, etc. should be readily available from the existing franchisees (as well as past and terminated franchisees) in the system.By speaking to a range of franchisees (from most successful to lease successful), a prospective franchisee should obtain a better perspective of the franchisor and the franchise system or opportunity.

Associations

Associations such as the Canadian Franchise Association (“CFA”) are an excellent source of information about franchisors and franchises.For instance, the CFA may have information regarding previous complaints, membership standing with CFA, as well as competitors of the franchisor.

Industry Publications

There are a number of franchise magazines that provide ongoing analysis on the franchise industry in general and feature articles on specific franchises in particular.The Canadian Business Franchise Magazine regularly prints current information about franchises as well as provides various franchise overviews over the course of the year.The writer cautions that advertorials and rankings should be used only as an aid in your evaluation and should not be relied upon in your decision making.

Credit Rating Services

Credit rating services should not be overlooked as an evaluation tool, particularly in respect of a non-public company.

Business References

Though it is always recommended to request a list of references from the franchisor, a prospective franchisee may also want to contact others not listed with whom the franchisor does business.

Competitors

In order to analyze a franchisor’s strengths and weaknesses, it may be very helpful to contact the franchisor’s competitors.

Trade Shows and Expos

Franchise and business opportunity trade shows provide a great opportunity to meet a number of franchisors at the same time.

Franchise Consultants

There are numerous franchise consulting companies and independent consultants who can provide a wealth of information on either the franchise industry or a specific franchisor.

The Internet

There are a great number of franchise specific websites that will assist you in researching the franchise industry.

Basic Legal Considerations regardingPurchase of Franchised Business and Franchise Re-sales

There are two main components to a franchised business: the franchise relationship and the underlying business.The interplay of these components becomes apparent when a person is faced with choosing to purchase a new franchise directly from the franchisor or to purchase an existing franchise from a franchisee. This article will briefly examine the differences of each option by highlighting the basic steps of a typical transaction.

Purchase of a New Franchise Directly from the Franchisor

Step 1. Ontario passed franchise-specific legislation (the “Act”) requiring franchisors to disclose all material facts about the franchise system to prospective franchisees.In Ontario, prospective franchisees have a minimum of fourteen days to review such material.

Step 2. The prospective franchisee typically conducts only general due diligence, such as contacting franchisees.If the location is not identified at the time the franchise agreement is signed, it is difficult to estimate the franchise’s potential.Earning projections should be carefully scrutinized before reaching a decision.

Step 3. The franchisee is frequently required to execute a new franchise agreement; lease or sublease; personal guaranty; and a general security agreement. Mature franchisors are traditionally reluctant to negotiate the terms of such documents.

Step 4. Choosing the location and construction of the premises may be the responsibility of the franchisee.

Purchase of an Existing Franchise from a Franchisee

Step 1. Typically with the assistance of a solicitor or a broker, the prospective franchisee will make an offer for an existing franchise, which may be through an asset or a share purchase agreement.

Step 2.The prospective franchisee will inspect the financial history of the business and the contracts it may be assuming.One needs to focus on the remaining term of the franchise agreement and location lease and whether the length of the term can be extended.

Step 3. Additional considerations includeobtaining the franchisor’s and landlord’s consent to the transfer; reviewing the disclosure document (although the Act provides for an exception to the requirement for the franchisor to provide a disclosure document in re-sales, the majority of franchisors err on the side of caution and provide disclosure documents); transfer fees to franchisor; refurbishing the location; executing a current franchise agreement/lease or assuming the existing contracts; and completing the training program.

In short, there are significant differences between buying a new franchise from the franchisor and an existing franchise from a franchisee (there is a 3rd option not discussed in this Article, which is to buy a corporate store).Each option has its pros and cons and a franchisee should seek legal counsel with experience in franchise matters to review its particular situation.

Start-Up Business Risk

The alternative to buying a business is simply starting a new and independent business.Start-ups may seem attractive since you may be able to save development costs and be able to grow the business to suit your own style.However, the reality is that most new businesses, over 75%, do not survive past 5 years.Why do so many independent business start-ups fail?The major causes are typically:

Lack of “hands-on” knowledge of the business;

Poor sales growth partly due to no name recognition;

Unable to secure good employees;

High costs of sales due to mismanagement.

Lacking hands-on expertise is a serious problem that can only be rectified with proper training experience or hiring qualified people.Both options will cost you considerable amount of money, for example an experiencedmanager will expect to be paid over $40,000 even for a small business.Another alternative is buying into a good franchise system which provides you with all the training you’ll need.

The Franchise Advantage

In fact, the better franchises offer several key advantages over independent businesses including:

b)Access to prime real estate – most major landlords, including the large shopping centres, prefer dealing with national retailers and franchisors.An independent business owner may not have access to the prime real estate.

c)Obtain business expertise quickly through the franchisor’s comprehensive training program.In a matter of several weeks you will learn what will take you a year to learn on your own.

d)mass purchasing power through the franchisor’s negotiated supply channels where you will enjoy volume purchase pricing and faster deliveries.

e)Well known brand name and reputation of the franchisor’s trade name.The benefit is having instant market presence rather than having to build up your market brand.

While franchises are not everyone, the better franchises can reduce your business risk, provided you are matched to the right kind of business.

Buying an Existing Business

Regardless whether you choose a franchise or not, buying an existing business has clear advantages over a start-up business.The biggest advantage is that you by-pass the risky start-up period.With an existing business you can more confidently predict your own future profitability based on what the business is currently doing.However, there are also risks involved in buying an existing business, namely:

a)What are the actual profits of the business?Depending on the type of business, proper financial statements may not be available and meansof verifying profits need to be explored.

b)How much goodwill is the business worth? Most sellers over estimate what their businesses are worth and banks normally don’t finance goodwill.

c)Is there potential to grow the business?You need to learn about the business, know your own abilities related to operating the business and research the market to better determine the true potential.

d)Are there any hidden problems in the business?- Contracts such as leases, license agreements and on-going obligations canseriously affect your ability to earn future profits if not understood and dealt with before purchasing.

Needs Analysis

Before setting out to look for business opportunities, it is highly recommended that you first determine your own needs & abilities when it comes to managing a small business.Some key areas to assess yourself on are:

a)My available cash and net worth.How much can you really afford, considering that you need to add closing costs and working capital on top of your down payment on the business.

b)How much financing will I qualify for? Banks typically are more cautious and lend less money for businesses than they do for home mortgagtes.For example, an average credit score may be good enough for a mortgage but may not qualify you for a business loan.

c)Your ability and willingness to work.It is not recommended that you purchase a restaurant or retail store if you hate working evenings and weekends, as those are the most profitable times of the week for those buisnesses.

Determining the actual profits and growth potential of the business requires investigations and market research.Most people start their market research by reviewing public information, such as doing google searches on the internet, reading magazines, etc.However, to obtain more useful information about the business and its market, one must conduct primary research, also known as “meet and greet”.That is, contacting suppliers, bankers, competitors, nearby franchisees, etc. to find out what is happening in and around the business.If you’re not comfortable doing this, then it’s best to hire someone to do it for you, rather than skip this important research work.

The value in doing all this research is gaining much more knowledge about the business such as what actual profits are, if there are any obstacles to enjoying the business and of course what opportunities are there to grow the business.All of these factors will have an affect on the valuation of the business.

Business Valuation

When placing a value (your purchase price) on the business, you should consider the following elements:

1.Separate the Property value (if any) from the business cash flow;

2.Determine real profit from the actual sales and operating costs;

3.Decide on a fair earnings multiple based on the industry and condition of the business;

4.Factor in any limitations that can reduce its value, such as contracts, market potential.

Basic Financing

If you know you will require bank financing, establish how much financing you are likely to get for the business before making an offer.

Most small business owners will have three options described below.

●Home mortgage financing – is the least expensive and most accessible form of loan available if you have enough equity in your house and don’t mind tying your house to the business.

●Business Loan – Most small businesses are on a lease and would qualify for a small business loan.The bank requirements for business and commercial loans are much more stringent than home mortgages. Your down-payment will usually range from 25% to 50% of the purchase cost andyou will also be expected to have additional collateral on the side.

●Business lines of credits are granted selectively by various banks, some refusing to consider them for start-up small businesses.

Banks will also require you to submit a proper Business Plan detailing how you intend to pay for the purchase, operate the business and repay the bank loan.The best approach is to submit a properly prepared business plan with all supporting documents to one bank (ideally the bank most favourable for your type of business) than “shop around” for banks as a decline from one bank may trigger suspicions from other banks.

Conclusion

First time buyers may be over whelmed with the amount of time, effort and knowledge required to navigate their way through the steps to buying the right business.Retaining business professionals with relevant expertise will provide you with knowledge and confidence to make the right investment decision.These professionals are typically advisors such as lawyers, accountants, business advisors.Experienced commercial real estate agents should be able to give you a selection of suitable opportunities to chose from.Once a potential business is selected, your advisors should step in to impartially assess the risks and income potential.

By using professionals for what they are designed to do, you’ll be able to make an informed decision and avoid common pitfalls and traps on your most important investment.

Contact:

Claus Etzler:

Claus Etzler is an experienced small business consultant in the areas of franchise purchases, business plans and bank financing.He can be contacted at 647-401-7013 or This email address is being protected from spambots. You need JavaScript enabled to view it.

David Gray

David Gray is a lawyer with Macdonald Sager Manis LLP.He has significant experience in the areas of franchising, licensing, intellectual property and commercial and corporate disputes, and regularly advises clients on franchise-related matters. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. or (416) 364-4596.

Probably you are familiar with the use of evaluative mediations in situations involving insurance claims, personal injury, wrongful dismissals and maybe even in commercial agreements. In these cases the mediator usually tries to work out numbers in an effort to settle somewhere between the opposing positions the parties present. But mediation can offer more.

Most lawyers have one or two files in the drawer which naggingly return to your calendar tickler every once in a while. These are the files which do not fit into the usual mould of litigation, or numbers-based or rights-based settlement. I am guessing there is one in your drawer right now.

Consider pulling it out of the drawer and setting up an interest-based mediation. It may be that the very reason this file has never really experienced the light of day is that the parties have been positional, and you have not found a way to resolve their differences. Or it may be that the issues do not easily lend themselves to legal remedies.

An interest-based mediation has the advantage of moving people away from rights and remedies and into their real underlying interests. In this process, we try to identify the real issues and turn the parties into a team working together to come up with solutions to those issues. This reduces the focus on each other and shifts the focus to solving the problem. You would be surprised how people can actually take real pride in coming up with creative solutions once the heat between the parties is diffused.

Take for example, an ongoing construction dispute. The parties were so hot at each other that they could not even settle the issues that were required to be arbitrated pursuant to the agreement. In a case of that kind, although it is unusual, a mediation has the advantage of bringing the parties together in a co-operative context to work out creative solutions without having to get directions from a court in a matter that was never intended to go to court.

Speaking of court, consider the following matter. A religious institution owns a building and members have divided into two factions. One faction is in the building, and the other is out and worshipping elsewhere. The Board of Directors is a de facto group of lay members of the inside group, some of whom have never been elected. There has not been an election in over 10 years. The case has been in court for a few years without any real progress.

Does this sound like one of those impossible cases in your drawer? A case like this was brought to me for mediation. Through a series of sessions over a period of time, we have effectively been able to bring the two factions together through representatives working in harmony. We have been able to re-establish criteria for elections, and have dealt with many issues of governance. Effectively, the by-laws are being re-written in the course of the mediation to enact the achievements which have been made in each step of the mediation. Could a court ever make an effective order in such a case?

Another example of an unusual case that was going nowhere in court but that was resolved through a series of meetings and mediation, involved the erection of an over-sized headstone which offended the by-laws of the organization responsible for maintaining the cemetery. The deceased person was a young wife and mother who had immigrated to Canada from a cultural background which is very expressive. Her widowed husband expressed his grief in a permanent form by way of having a very large monument created with features which offended the rules of the organization responsible for maintaining the cemetery. The monument had somehow been erected but from the point of view of the responsible organization, could not stand because it broke not only with tradition, but with its rules and by-laws. It took down the monument. The widower was a member of an association that had rights of burial in the cemetery. He had sued. How could the court unwind the various responsibilities and make any effective order concerning the monument? A series of meetings separately, and together amongst some of the parties, led to a satisfactory resolution for all. This involved modifications to the monument and its re-erection in a fashion that all parties could live with. At the same time, pre-existing relationships between the various parties were maintained. This is representative of the win-win result that so often occurs in interest-based mediation.

But this type of result is not limited to institutional parties. Take the case of two family members in a serious disagreement over the degree of care necessary for an elder member of the family. Each party had lawyers and there was a significant power differential and life-long differences between the siblings involved. Each of them and their spouses had powers of attorney for personal care in respect of the elder member of the family. Consider the number of ways in which differences could arise in such a case.

Notwithstanding all of the problems faced at the beginning of that matter, through the efforts of counsel the parties were brought to mediation along with their spouses. The first half of the day was spent with each of the parties addressing the mediator and not each other. But by midday the parties were speaking to each other in a positive fashion for the first time in a very long time, and beginning to work together with the mediator to a resolution of their differences. Issues that had been unresolved and made care management difficult for two years, were resolved in one day.

Interest-based mediation can be used not only in situations personal family differences or cultural differences, but also in situations involving different political philosophies, honest disagreements, and legitimacy issues where legal remedies do not really do the job.

If you have some of those unusual types of files sitting in your drawers which need your management, is it not time you considered an interest-based mediation?

PUBLISHED IN THE International Forumof Travel and Tourism ADVOCATES JOURNALSummer 1998 Edition BY PAUL JACOBS, Q.C., C. MED., C.ARB.

The time has come for Alternative Dispute Resolution, more commonly known as ADR. ADR involves a series of procedures as an alternative to the courts for purposes of resolving disputes.

The types of disputes which can be resolved by Alternative Dispute Resolution are endless. These can involve international commercial transactions, shareholder disputes, joint ventures, partnerships, disputes between franchisor and franchisee, customer and supplier and even breakdown in family business relations. There are a number of forms which an Alternative Dispute Resolution can take. Among these are principled negotiation, neutral case evaluation, mediation, arbitration, combined med-arb, and mini trials. This list is not exhaustive. There are other procedures available, and some of these procedures can even be combined or acted upon one after the other, if one does not work.

A number of the forms of ADR share common advantages. For example; imagine having a dispute with a major supplier. This might be a dispute which is based on a product or service, but it is definitely between your companies and maybe even between individual personalities in the companies. You would have been doing business with this company for some time and you would expect to continue doing business with them were it not for the dispute. Should you sue? You know how long lawsuits take. The delays in the court are infamous. Everyone complains that the cost of lawsuits is too high. And after a lot of frustration and expense, people become even more entrenched in their positions and less willing to work out a settlement. The case can go to a trial with a Judge who is not attuned to the industry problem. The trial is public. After the long struggle most of us have seen during the recession, most people are no longer interested in getting into another struggle with a lawsuit.

The alternative is one of the forms of ADR. These share in common the willingness of the parties to try to resolve their difference. The case can be scheduled quickly, and since it is the only case, for example, the mediator or arbitrator will deal with, it will proceed when scheduled. The parties pick the neutral person who will assist in their process. The parties share the cost. The parties agree in advance on the issues to be submitted and the terms of reference by which the procedure will be governed. In other words, you make your own rules. You pick a facilitator, mediator or arbitrator who knows the field. The procedure is held in a confidential setting and the results are not published. There are no lengthy rules or court procedures to slow down the process.

Sometime ago, IBM and Fujitsu submitted for arbitration a case that had been in the courts for many years. The case was resolved in a number of months even though it involved hundreds of millions of dollars. The parties were able to get on with their business.

If all of this sounds too good to be true, it is not. Mediation, arbitration and other forms of ADR have been available and are available to everyone. It is simply a matter of knowing about their availability.

Mediation is the process whereby two or more parties to a dispute use a neutral third party to assist them in reaching a settlement. The process is voluntary, so it only works when both parties are willing. It involves negotiation, where the parties themselves are present, but the mediator works to facilitate settlement, that the parties themselves have been unable to reach. The result doesn’t bind the parties legally and if it doesn’t work out, they can still take their dispute to arbitration or to court.

The mediator has special skills in resolving disputes, and knows the subject matter of the dispute. He or she helps the parties to identify the real issues between them, and tries to find a settlement that satisfies the interests of both parties.

By working with the parties on their underlying interests, a mediator can achieve a result at settlement that no other form of dispute resolution can do. For example, in arbitration, or a court proceeding, one party wins and the other party loses. Clearly, this is always unsatisfactory to the loser. But in a mediation, there is no loser. It is a win win situation if the parties come to a settlement.

The mediator achieves this by concentrating on the real interests of the parties and not on their positions or their rights in law. Often their rights in law are what entrench parties in opposite camps and lead to delays in the normal court system. But by looking to the interests of both parties, the mediator gets right to the heart of the problems and works with the parties - together and separately - to achieve a mutually beneficial result.

There are obvious advantages to mediation including speed, cost savings, and confidentiality.

When a mediator is appointed, time is scheduled for the mediation and any relevant documents are exchanged in advance. There are no formalities to argue about, such as the relevance or admissibility of documents. The parties agree on their documentation, or there cannot be a mediation. The mediation is heard at the appointed time, and unlike the court system, no other case is being mediated that day before the same mediator. As a result, there’s no delay for hearing, and the parties are not wasting their time.

The parties save money because, since procedures are informal, there are no technical delays and no appointment backups. The parties share the cost of the mediation equally. Each has a commitment to a solution that works. In many cases, they also have a need to continue doing business together, and want to put a dispute behind them quickly and with mutual satisfaction. Mediation achieves this result.

Confidentiality is another advantage of mediation over the normal court system. The parties set their own terms of reference for the mediation. Any discussions during the mediation and involvement by the mediator may not be repeated before a court in a later proceeding if the mediation fails. As a result, neither party is prejudiced by what takes place in the mediation in the event of failure, and the parties have every reason to be fully frank in their negotiations.

Mediations also contain the issues in a case. For example, when a case is allowed to go on longer, additional disputes sometimes arise in the framework of the case, and it becomes more complex, delayed, longer and more expensive. Mediation avoids all of these problems. In addition, when the parties reach and sign an agreement, it becomes enforceable, just like any other agreement.

Mediations are flexible and are available to almost any kind of dispute. The key to success is the willingness of the parties to work together creatively to find a settlement with the assistance of a skilled mediator. This person should have the trust of both parties and, of course, must be objective and neutral in order to facilitate settlement.

Mediation has been available for a long time, but it has recently come to the forefront of dispute resolution. Parties have suffered delays in the judicial system for a long time, and should be aware of their alternatives.

Arbitration is the resolution of a dispute through a binding decision of one or more arbitrators. The role of the arbitrator is much like that of a Judge in that he/she or they try to resolve the dispute according to the law, rather than by way of compromise. The procedure, while less confrontational than court proceedings, is clearly adversarial. There is a winner and a loser. The awards made by arbitrators are, in the normal course final and enforceable in the same fashion as a judgment of the Court.

The advantages of arbitration are numerous. First and foremost, the process can, to a certain extent be dictated by the parties. The experience of agreeing on the process often brings the parties closer on the merits of the issue between them. And the more that is agreed upon, the lower the likely cost.

Another advantage of arbitration as opposed to litigation is the preservation of some degree of the relationship between the parties. If the dispute between the parties arises from their commercial dealings, both parties may wish to try and preserve the nature of the relationship to their mutual benefit. Unfortunately, the litigation process, due to its length and expense, often pushes the parties farther apart, thereby destroying any possibility of a continuing relationship.

Unless there is a substantial amount of money involved, it is generally advisable to have only one arbitrator. The arbitrator is chosen by agreement between the parties. If no such agreement can be reached, a court application can be brought to name an arbitrator.

Once an arbitrator is named, the parties will describe his powers and duties in a jointly prepared document called a "submission." This submission will also provide that the arbitration award can be enforced by the Court, should one of the parties not comply with the decision of the arbitrator. The submission will also set forth whether or not the award of the arbitrator can be appealed. However, the courts have shown a very strong reluctance to interfere with the award of an arbitrator.

Although there is an Arbitration Act in Ontario, the process of arbitration can be tailored by the parties to their own needs. Location of the arbitration, rules of evidence, and other considerations can be discussed and agreed upon by the parties and included in their submission.

It should also be remembered that, as opposed to court proceedings, arbitrations are not public information. Therefore, when business issues which you would prefer to keep from your competition are involved, arbitration has the distinct advantage of allowing you confidentiality.

In order to take advantage of the benefits of arbitration, consideration should be given to inserting arbitration clauses in agreements being drafted today. Such clauses are most easily raised with the other party to the agreement when goodwill is at its highest; i.e. when the agreement is first being negotiated.

Mediation

Mediation is a process whereby two or more parties to a dispute use a neutral third party to assist them in reaching a settlement. The process is voluntary so that it only works if both parties are willing. It involves a negotiation where the parties themselves are present but the mediator works to facilitate settlement that the parties themselves have been unable to reach. The result does not bind the parties legally and if it does not work out, they can still take their dispute to an arbitration or to court.

By working with the parties on their underlying interests, a mediator can often achieve a result at settlement that no other form of dispute resolution can do. For example, in an arbitration, or a court proceeding, one party wins and the other party loses. Clearly, this is unsatisfactory in all cases to the loser. In a mediation there is no loser. It is a win win situation if the parties come to a settlement.

Some of the obvious advantages to mediation include speed, cost savings, and confidentiality. When a mediator is appointed by the parties, time is scheduled for the mediation, and any relevant documents are exchanged in advance. There are no formalities to argue about concerning the relevance or admissibility of documents. The parties agree on their documentation or there cannot be a mediation. The appointed time is when the mediation is heard. There is no other mediation going on before the same mediator that day. In this way, there is no delay for hearing, and you do not waste your time.

From the point of view of cost, since procedures are very informal, there are no technical delays and no appointment backups. The parties share the cost of the mediation equally. Therefore, each has a commitment to a solution that works. In many cases, the parties have a need to continue doing business together and must put a dispute behind them quickly and with mutual satisfaction. Mediation achieves this result.

From the point of view of confidentiality, the parties set their own terms of reference for the mediation. Any discussions which go on at the mediation and any involvement by the mediator are not capable of being repeated before a court in a later proceeding if the mediation fails. In this way neither party is prejudiced by what takes place in the mediation in the event of failure, and the parties have every reason to be fully frank in their negotiations.

Mediation also limits the issues in a case; that is, sometimes when a case is allowed to go on longer, additional disputes arise in the framework of the case and it becomes more complex, delayed, more lengthy and more expensive. Mediation avoids all of these problems.

Mediation has been going on for years but has recently come to the forefront of dispute resolution. Parties have suffered delays in the judicial system for a long time and should be aware of their alternatives.

In the mid-1990's, the Attorney General's office of Ontario established a Mediation Centre employing a few staff mediators. A judge of our Superior Court was appointed to oversee the project. Trained mediators were asked to volunteer to take on selected mediations at the Centre during the pilot project which ran for about two years.

Also in the 1990's one of our Superior Court Justices had undertaken an extensive Civil Justice Review. One of the recommendations that arose from that study was to install a system of Case Management in selected areas of Ontario.

As a result, mediation and case management were both introduced into the Toronto legal community in the late 1990's. By 1999, enough time and experience had passed that the system of Case Management was installed for many areas of the civil litigation practice. Around the same time, a Mandatory Mediation system was commenced under a rule of practice. The other options for initiating mandatory mediations were provincial legislation or a practice direction from the Superior Court. The Attorney General wanted to use a rule and there was a significant and lengthy process through which issues surrounding mediation were vetted through the Rules Committee which consists of both lawyers and judges. The rule as it was published, became quite extensive, and included a host of procedures. Also, mandatory mediation was tied to case management which was under the direction of Masters and Judges of the Superior Court. At the time, there was a mixed reaction in the litigation community to the installation of case management because of the two schools of thought: those counsel who preferred to manage their cases on their own without interference by the courts, and those who felt that cases would be handled more efficiently if the courts were on top of them. In my view it was unfortunate that mandatory mediation was tied to the case management regime. As a result, it may not have had the best start.

As of 1999 then, mandatory mediations were established to take place within 90 days of the delivery of the first Statement of Defence. This in itself led to all kinds of problems. For personal injury cases, it was typically found that mediations were being called for too early, before serious injuries had fully resolved and were capable of proper assessment of damages. That led to many motions at court for extensions of time. There was a provision for a consent extension to be made by the officer in charge of mediations, but typically longer times were necessary in personal injury cases. So resort had to be made to the Masters.

Another problem which was commonplace was that in cases involving multiple defendants, especially defendants out of the jurisdiction, longer time periods were available for service of process. If a party defendant was served in Ontario and was able to enter a defence more quickly, parties who might not yet have been served outside of Ontario, were bound by a rule requiring them to conduct mediation possibly even before their defence was delivered. This made no sense at all and, of course, led to more motions before the Masters. The system was tied as I have said to case management, and case management was heavily focused on the clock rather than the parties. Timetables were set by the court which had to be adhered to or further motions had to be brought for extensions of time.

Compare all of this with voluntary mediations. In the case of voluntary mediations, counsel and their clients decide when they are ready to mediate. The lawyers obviously have to speak to each other in order to agree to conduct a mediation. At the same time, they can determine the timing of that mediation, and maybe every bit as importantly, they can agree on the mediator to be used in their case. While our mandatory mediation system did allow for selection of mediators, the rule also provided that if the mediator was not picked in a very short time, the system assigned a mediator. Counsel were then stuck with that mediator whether they would have wanted him or her, or not. Perhaps the statistic which arose from the two systems, tells the story. In the case of mandatory mediations, several years into the system, settlement rates were barely above 40%. In the case of voluntary mediations, the success level typically ran 70-75%. After thousands of mediations had been conducted in the mandatory system, and several years had passed, the statistics were not improving.

Also, with the passage of time, other developments had taken place. The two judges who had last been Regional Senior Judges in Toronto, had both been elevated to the Court of Appeal. In 2004, a longstanding and very practical-minded Superior Court Judge was appointed Regional Senior Justice for Toronto. I keep mentioning Toronto because as London is, Toronto is the hub of commercial activity and litigation activity in Ontario. Further, the case management and mandatory mediation regimes were focused in Toronto and Ottawa (and more recently, Windsor, Ontario), but have not been rolled out across the Province.

The incoming Regional Senior Justice inherited a system filled with backlogs of cases, insufficient judges to try them, overworked Masters, and no additional government funding. His Honour took a very careful look at the system and decided that some changes were necessary and they had to be made quickly. He undertook the process with the intention of establishing a Practice Direction which would suspend the Case Management Rule and the Mandatory Mediation Rule as they had been run for some five years. He knew the success rate comparison between mandatory and voluntary mediation and also recognized that cases could be managed where necessary, but Case Management was not necessary in every case. His Honour worked with the legal and ADR communities extensively. As Chair of the ADR Section of the Ontario Bar Association, I was heavily involved with the Regional Senior Justice in meetings, negotiations, and drafting submissions in respect of the intended Practice Direction. There were widespread meetings of the legal community and ADR community and considerable input provided to His Honour. That work went on from August through November 2004.

The new Practice Direction was published December 3, 2004 and came into effect January 1, 2005. It suspended the Rules governing case management and mandatory mediation for three years. The new Practice Direction makes provision for counsel to decide on the most effective timing for mediation. As a result, while a mediation is mandatory, the timing and the details are left to counsel to decide. It is fully expected that this item alone will lead to increased success rates in the Mandatory Mediation regime. There is a further provision that the mediation must take place no later than 90 days after the case has been set down for trial. There is also provision in other parts of the Practice Direction for a Pre-Trial or Settlement Conference. A judge will hold that conference and at that stage there is an opportunity to send the case off to mediation once more if it has not settled at an earlier attempt. One other factor at this stage is that the pre-trial judge will set the trial date for the case so that counsel will know there is a courtroom door awaiting them on an appointed date. Typically, these fixed dates for trial will not enjoy the prospect of adjournments. Accordingly, if the case is not settled earlier, counsel have one last kick at the can, while the courtroom door is opening if they fail to settle.

This Practice Direction is the subject matter of numerous presentations by our Law Society, Bar Association, and Advocates' Society at the time of this writing. I believe the Practice Direction is being well received by counsel and the ADR community. The Regional Senior Justice's intention is to save judges for trials, use Masters on procedural motions which are expected to be far fewer than during case management, and to have private mediators conduct mediations, both mandatory and voluntary, in an effort to settle the cases. It is fully expected that the success ratio of mandatory mediations will rise substantially as a result.

It is fundamental to mediation that the process be confidential. Or is it? Debates on this issue have been occurring for some time and will probably continue to do so.

There are at least three apparent ways that the matter of confidentiality can be addressed in mediation which arises in civil proceedings. Firstly, by statute; secondly, by a rule of practice; and thirdly, by common law. In this relatively short analysis, I want to address some of the considerations and events that have occurred with respect to confidentiality in mediation in Ontario, Canada.

In Ontario, unlike a number of American states, there is no statute to protect the concept of confidentiality in mediation. While mandatory mediation is an inherent part of our civil procedure, confidentiality has been established first by rule of practice, and then by judicial practice direction. The legislature has not as yet seen fit to develop legislation making confidentiality a statutory right of the parties in mediation.

For a period in excess of five years, we had a rule of practice relating to mandatory mediation which said, "all communications at a mediation session and the mediator's notes and records shall be deemed to be without prejudice settlement discussions". While the language of the rule itself used the term "without prejudice", the rule had the heading "Confidentiality". By and large, I think that both mediators and lawyers in civil practice recognize that these terms would be appropriate in mediation agreements signed by the parties before attendance. Most mediators I know certainly have a provision in their mediation agreements indicating that the process is confidential, that the mediator's notes and records are not compellable by subpoena, nor is the mediator compellable as a witness in court. Some mediators seek to clothe themselves with the same protection given to judges in this respect under our Courts of Justice Act.

As of January 1, 2005, the larger rule embracing the confidentiality concept was suspended for a period of three years and a practice direction was put in place by the Regional Senior Justice.

Where was one to turn to look for authority for confidentiality in the circumstances of there being no statute and no rule of practice? The answer, of course, lies in the common law. Hence the importance of developing case law.

In 2003, the Ontario Court of Appeal released a decision in the case of Rogacki v. Belz. In this case, the plaintiff brought a libel action against a publisher and the parties entered into a mandatory mediation. The publisher later published an article referring to the mediation process, not particularly disclosing any information exchanged at the mediation. The plaintiff sought an order of contempt against the publisher. There had been a Mediation Agreement in which the parties agreed not to disclose any oral or written communication that had occurred in the mediation. The published article did say that the mediation did not result in a settlement. The motion was brought on the authority of the rule above quoted as it then existed. The motion's judge found the defendant in contempt and the defendant appealed.

There were two written decisions in the Court of Appeal. The majority decision said that the rule under which the plaintiff moved for contempt was not available because there was no court order prohibiting the publication. The decision of the Court of Appeal also said that the motion's judge misinterpreted " the confidentiality" rule as not addressing confidentiality, but simply confirming the principle that without prejudice negotiations were not admissible in evidence unless they resulted in a resolution of the dispute.

The second judgment was a concurring judgment but with different reasoning and it was the decision of Madam Justice Abella, then of the Ontario Court of Appeal, now of the Supreme Court of Canada. Madam Justice Abella wrote that she agreed with the conclusions and excellent reasons of Borins J.A., but added that important policy questions about the mandatory mediation process arose out of the case. She agreed that the rule quoted "does not create an enforceable guarantee of confidentiality, but that does not mean that there do not exist significant public policy reasons for keeping the mediation sessions confidential". She went on to say, "The purpose of protecting confidentiality in the mandatory mediation process is to further the public policy goal of encouraging settlement discussions…". Further Madam Justice Abella wrote, "The failure to protect confidentiality could profoundly prejudice the effectiveness of mandatory mediation. It is difficult to see how anyone would agree to be open and frank in discussions designed to effect settlement - discussions they have no choice about participating in - when there is no protection for the confidentiality of the process".

Madam Justice Abella concluded by saying, "In the absence of a Rule or legislative provision explicitly declaring what most lawyers and participants to the mandatory mediation process likely assume, namely, that is confidential, no such clarity exists at this time sufficient to justify attracting so powerful a remedy [as a contempt finding]".

The language of Madam Justice Abella in the Rogacki case may find its way into further debate on the confidentiality issue, particularly now that Her Ladyship is a Justice of the Supreme Court of Canada.

In 2004, the case of Rudd v. Trossacs Investments Inc. came before the Ontario Superior Court of Justice.

In the case report, Justice Lederman writes as follows: "On this motion, the plaintiffs seek an interim order requiring the mediator to give evidence as to what transpired at a mediation between the parties held on January 12 and 28, 2004, including the terms of the settlement reached. This is in aid of the plaintiffs' main motion which is in essence for rectification of the written minutes of settlement to correctly reflect the oral agreement arrived at in the mediation and for its enforcement. It is the position of the plaintiffs that the minutes of settlement, which were handwritten by the mediator with the input of counsel and executed at the mediation, inadvertently left out Morris Kaiser ("Kaiser") as a party to the settlement when, clearly, the intention was that he be made a party.

The defendants deny that Morris Kaiser was a party to the settlement".

Justice Lederman went on with some of the background detail of the case and then wrote, "In an effort to promote the settlement of disputes, the privilege for settlement discussions is well-recognized. In the absence of such protection, few parties would initiate settlement negotiations for fear that any concession they would be prepared to offer or admission that they may make could be used to their detriment if no settlement agreement was forthcoming". His Honour also made reference to the Rule of Practice and the case of Rogacki v. Belz. Perhaps of even more importance, His Honour made reference to the mediation agreement between the parties which contained the following terms in respect of confidentiality:

'Confidentiality

The parties agree that all communications and documents shared, which are not otherwise discoverable, shall be without prejudice and shall be kept confidential as against the outside world, and shall not be used in discovery, cross-examination, at trial, in this or any other proceeding, or in any other way.

The mediator's notes and recollections cannot be subpoenaed (sic) in this or any other proceeding."

Interestingly, Justice Lederman also made reference to the language of Justice Abella in the Rogacki case referred to above. His Honour even went on to say, "Having said that, since privilege and confidentiality are critical to the success of the mediation process, they should not be lightly disturbed. Some evidence must be adduced on the motion to demonstrate that the mediator's evidence is likely to be probative to the issue and that the benefit gained by the disclosure for the correct disposal of the litigation will be greater than any injury to the mediation process by the disclosure of discussions that took place".

Despite all of the above, Justice Lederman felt that the mediator was in a position to provide important information as to whether the minutes of settlement as executed were inconsistent with any prior or oral agreement among the parties. The order was made for the examination of the mediator as a witness on the pending motion with questions being limited to his knowledge and understanding, if any, as to whether Kaiser was or was not a party to the settlement agreement that was arrived at in the mediation.

Leave to appeal this decision was sought at the Divisional Court. The issue, of course, was of great importance to mediators and civil counsel. In my capacity as Chair of the Ontario Bar Association, ADR Section, I brought this case to the attention of my Executive and a significant debate ensued. There was an unanimous decision to bring the case to the attention of the Canadian Bar Association for direction as to whether it would seek to intervene in the case, or whether the Ontario Bar Association should seek to intervene. Ultimately, the CBA National Executive left the issue with Ontario, the jurisdiction in which these developments had occurred, to decide on the action it should take. I personally made the submissions to the Ontario Bar Association Executive as to why the OBA should seek intervenor status in this important case. The Ontario Bar Association Executive subsequently decided to seek intervenor status.

On March 4, 2005, the Divisional Court heard argument on the case from the parties and from the OBA. Mr. Justice Howden delivered written reasons on March 7, 2005 permitting the Ontario Bar Association leave to intervene, and permitting leave to appeal the decision of Justice Lederman. Justice Howden wrote, "It is desirable that leave be granted because any added exceptions to the confidentiality principle in mediation will arise again, and as compelling testimony by order is per se an interlocutory matter there is no other way for the issue to be determined". He went on to say that he doubted the correctness of the earlier decision, "because it requires a mediator to in effect cast a tie-breaking vote in a case where he wrote the agreement during the latter stages of the mediation session with input from counsel". His Honour went on to say, "The public importance of this (as the first decision re: exception to mediation confidentiality known to counsel who appeared before me) issue in respect of the expectation and significance of confidentiality in mandatory mediation is, I think, self evident".

It is important that Justice Howden recognized that a mediator ordered to testify would essentially become a witness against one party no matter what he said. This would fly in the face of the neutrality concept which applies to every mediator. The earlier decision also appears to disrespect the agreement of the parties despite the judge recognizing that agreement was in place. When a jurisdiction has no statute and no rule governing confidentiality in mandatory mediation, it is of critical importance to have good case law. A panel of the Divisional Court will be hearing the appeal including the intervenor OBA's submissions, most likely in the fall of this year.

I have seen no definitions of this concept, but among business people and commercial mediators, the term is certainly developing. In my experience, a deal mediation may be distinguished from litigation mediation in a number of ways.

Among the differences there is firstly no existing litigation or structured dispute between the parties. Secondly, the parties may therefore choose to be unrepresented by counsel. Thirdly, the parties may already be commercially connected through some form of agreement, or may wish to negotiate a new agreement, but need a facilitator.

These differences alone can create a completely different complexion in deal mediation from that in litigation mediation.

Let me offer as one example the case of two principals in a commercial corporation who hold 50/50 interests in shares and have in fact, a shareholders agreement. This would typically be a document which was negotiated with some care and consideration, signed and then deposited in a drawer or a file not to see the light of day for some years. Why does it surface now?

It may be that the shareholders have different styles and different strengths, and that over time their different views have led to breakdowns in communication, or even to deadlock. When events of this type occur, there is inevitably a domino negative effect on staff and on the work environment generally. These typically translate into a negative effect on revenues in a "small business". A situation such as this may come to the attention of the corporate solicitor, but he or she would most likely be in a position of conflict in attempting to mediate between the principals of the company.

So how does a mediator get the mandate to conduct a "deal mediation" in circumstances such as this? It is possible that one of the principals who knows a mediator, makes the contact. However, in those circumstances the other principal may not be prepared to agree to a person suggested by the other equal shareholder. Perhaps the corporate counsel will make a recommendation. In circumstances where corporate counsel becomes involved, it is probably most likely that he or she would offer the names of two or three mediators and let the parties decide for themselves who they should use. In some measure this could lead to a "beauty contest" where the shareholders either together or separately interview potential candidates for the mediation. However, such a meeting or meetings offers the mediator an opportunity to ask many questions of the principals, the answers to which will be needed in the mediation process. The referral might come from a neutral service provider consulted by one of the parties, or by a lawyer for either of them.

Once the parties agree on a mediator, there should always be a mediation agreement. The individuals themselves will be the parties to the mediation. The corporation may also be a party. In the course of the preliminary interviews, the mediator should have discerned some of the different views and styles of management from the parties.

Keeping those in mind, the mediator should have a carefully crafted mediation agreement delivered in draft form to the parties along with a template for a statement of issues. The mediator should remind the parties that an issue for one is an issue for both.

While the documents are out to the parties for review and completion, the mediator should be considering what he or she has learned about the goals of each of the parties, their understanding of the shareholders agreement, the nomenclature which will be used in the mediation to overcome any potential imbalances, and generally their consideration of the type of techniques which may be necessary to employ during the mediation.

The parties should be instructed to list all the issues on their minds; what they believe to be their own strengths; their goals for the company in the short term and medium term and possibly even the long term; to undertake to work together with the assistance of the mediator in negotiating new strategies for the ongoing operation of the company, the increased potential for sales and revenues, and ultimately the unification of management and management philosophy.

Once the mediator receives the statement of issues from each of the parties (and they must have sent copies to each other as well), the mediator should look for obvious similarities in each aspect of the statement of issues. The mediator should list those similarities to later demonstrate to the parties that they may not be as far apart as they thought.

In terms of the differences between the parties in their statements of issues, it is still possible to look for generic underlying issues; for example, trust, frustration, and such matters which are not usually addressed in these actual words.

In the first meeting, emphasis should be put on the voluntariness already demonstrated by the parties having agreed to mediate, having signed the mediation agreement, and having appeared in person for the mediation. These are all positive signs of voluntariness and a willingness to achieve an agreement. The venue for the mediation should be neutral, and not at a place of business of either party. A hotel boardroom is perfect.

The parties should be told that they have an important role in negotiating their new deal and that with the assistance of the mediator, it is the parties themselves who will become the authors of their deal. They should also be told that by virtue of authoring a deal, they will be most likely to live up to its terms.

It should be established very early in the first session, that the parties have similar goals in connection with the business of the company itself; for example, it may be that they wish to build sales to a certain level over the next five or ten years, and then sell the company, dividing the proceeds. Once this sort of framework is established, the mediator can work on a consistent basis through each of the steps, working the parties in the direction of small, but growing, points of agreement.

Language should be addressed and certain terms dispensed with. For example, the concept of "complaint" can be changed to "observation" or "concern". The concept of "I have a solution" can be changed to "suggestions" with a positive spin. Changing nomenclature in this fashion will overcome the use of language which has one party pushing the buttons of the other to become angry and lose focus.

The use of flip charts is very important. It is an old technique, but if the issues are listed by the mediator on a flip chart, then the parties can be asked to work together to find potential solutions, focusing on the chart, and not on each other.

I had a deal mediation recently where a business retreat was going to be held later in the year. There was a goal established in the mediation to develop a unified management front so that the principals could sit side by side, shoulder to shoulder, and discuss their philosophies in common, and their mutual goals, to their management and staff.

In cases where there is a target date for the resolution, a timetable should be worked out to ensure that enough dates are made available by the parties and the mediator to complete the task at hand.

This is only one typical example of a deal mediation. It is quite possible that mediators will become involved in negotiating deals in the first instance with the parties directly and that the lawyers will only become involved in drafting and finalizing the contract.

The emphasis in each of these situations is in making the deal, or the new deal, and not mediating a resolution to the conventional dispute.

APRIL 2006

In 1999 I was retained as counsel by the solicitor for a wife in a family law matter. The husband and wife had opted to move out of the court system and put their various corollary relief issues in the hands of a non-lawyer professional in family matters who was mediating and arbitrating. They signed an agreement and embarked upon a process which turned out to be fraught with problems. At a point where the wife felt she was being treated unfairly following a number of developments, her counsel tried to have her withdraw from the process, but the mediator/arbitrator would not permit that. Presumably, his view was that one might be able to withdraw from a mediation, but not from an arbitration and he considered them to be at that point, in an arbitration. What is clear in hindsight is that this particular mediator/arbitrator blurred the lines between the processes. While that type of approach is sometimes used in labour matters where all the parties are familiar with that process, in this family law matter, it led to great difficulties.

I brought an application in court to set aside two arbitral awards and for an order removing the arbitrator from the arbitration itself.

This case was argued over the course of a few days and the decision was reserved and delivered on January 30, 2001. The original judgment ran 31 pages, but the following is a case summary originally published in the Law Times newspaper in Ontario on April 9, 2001. This summary points out many of the problems in the handling of the process and points out how the court viewed these in reference to the Ontario Arbitration Act 1991. The case is Hercus v Hercus [2001] O.J. No. 534.

“FACTS: Application by the wife to set aside two arbitration awards made by M., and for an order removing the arbitration firm and the arbitrator M. personally. The impugned arbitration awards dealt with the payment of arbitration fees adversely to the wife, and the second award was entitled Arbitral Decision Regarding the Parenting Plan Review. The parties had signed a consent to resolve issues of custody, access and child support by way of mediation/arbitration, that it would be carried out under the Arbitration Act, S.O. 1991. c.17, and that the parties would be equally responsible for the costs of the mediation/arbitration. They then signed a Mediation/Arbitration Agreement which was embodied in a court order and constituted a domestic contract, It provided that custody, access, child support and costs issues including the quantum, timing and method of payment, that the issues were submitted for interim relief and final determination, that subsequent issues including variation were subject to the terms of this agreement and that the parties were jointly and severally responsible for the arbitrator’s costs.

After completing an arbitral decision concerning summer vacation access, in September of 1998, M. released a parenting plan. The plan gave custody to the wife and extended access to the husband. In April of 1999, after receiving comments from both parents that they were unhappy with the plan, M. indicated that a review of the plan was in order. The wife responded that she was not in funds and was unable, to participate further such that she was forced into accepting the recommendations in the plan. Subsequently, Minutes of Settlement and Separation Agreement was signed by both parties incorporating the Mediation/Arbitration Agreement which confirmed the parties’ intentions to follow through with the parenting recommendations. A consent judgment was entered into incorporating the foregoing.

After that time, the husband contacted M. in respect of the issue of attending parent-teacher interviews for the children which plan conflicted with those of the wife and children. In the result, M. decided to determine the issue by way of arbitration, and essentially required the meeting to proceed unless the school would co-operate in changing the dates. The letter was not received by the wife until after the date set for the interviews. Until then she had no idea that the husband had contacted M.

The husband next raised the issue of the one child’s desire to reside with him and consulted with M. in that respect. He was told that the issue would be considered in the context of an overall review of the parenting plan. The husband requested that the wife not be advised of the reason for the requested meeting given his concerns about his wife’s reaction to the possible change in the child’s residence. From that point in time in February 2000 onwards, the wife was not advised of this particular reason for the parenting plan review. M. advised the wife that he was undertaking an overall review, and secondly, that he had concerns that the wife’s portion of his account was overdue. The wife resisted participating in that she believed that the plan as crafted by M was final and she did not have the financial resources to continue the process in any event. She also indicated that she was opposed to the manner in which the issues were handled. The husband then paid the wife’s portion of the overdue account and requested that M. arbitrate the issue of that payment. M. issued the first arbitral decision in issue requiring the wife to pay the amounts already paid by the husband, interest and all costs incurred by the husband in recovering the retainers paid on the wife’s behalf, and an additional unexplained $600. M. then issued an arbitral directive that the wife prepare a submission on the parenting plan, and furthermore set appointments for the children’s interviews. At that time, in September of 2000, the wife was alerted for the first time to the husband’s concerns that one child wished to reside with him. By that time, the wife had withdrawn her consent to M. and his firm acting as mediator and arbitrator. M. issued his arbitration decision regardless with commentary on the impediments placed upon the process by the wife’s actions. Re made an arbitral award of joint custody, with the children having their primary residence with the father and access to the mother. The basis for the award was instances of physical abuse alleged to have been reported by the boys at the hands of the wife’s new husband and her alienation of the children from him. The alleged physical abuse was reported to the Children’s Aid Society although the award was issued prior to its report which concluded that no child abuse could be verified. The wife opposed the arbitral awards and the appointment of M. and his firm on the main grounds of his unfairness to her in the mediation/arbitration process.

DECISION: Applications were granted. A preliminary difficulty arose in that the agreement was a hybrid mediation and arbitration agreement. It was clear that the parties expected that both procedures would be used and it was reasonable to infer that they expected that mediation would be entered into first, failing which they would engage in arbitration. M. attempted to mediate some issues but not others. He moved quickly to arbitration on the issue of parent-teacher interviews without exploring mediation. It was completely bypassed when he endeavoured to set up the review process.

At that time, in addition, the wife was not advised of one of the main issues to be dealt with at the review, being the husband’s wish to have the child reside with him. The manner of scheduling the parties’ appointments was contrary to the agreement which provided that they were to be based on the pasties’ schedules. However, the wife’s schedule was rarely taken into consideration. Furthermore, it was clear that the parties expected that the issues be resolved finally subject to variation as provided for in the. applicable legislation. The parenting plan was final on its face. The plan was incorporated into a court judgment. However, M. on his own initiative proposed a review of the plan for which there was no framework in the parties agreement. M. had no jurisdiction to reconsider the issue of custody.

In addition, the lack of timely disclosure to the wife of the husband’s concerns impaired the integrity of the process and resulted in the wife’s not having been treated fairly and equally as mandated under the act. M. repeatedly asked the wife for her input into the review, without disclosing the husband’s proposed claim. The wife was also not treated fairly in the context of the allegations of child abuse. M. relied upon the allegations in making his decision while the investigation was underway and before any conclusion was reached. Given the timing of his decision, it was clearly not done as a matter of urgency. The wife’s refusal to participate in the process did not obviate her right to be treated fairly and equally.

Furthermore, M. considered the wife’s failure to participate as a factor adverse to her. She in fact had the right to withdraw to the extent that the process was mediation and not arbitration, a distinction not clearly drawn by M. Lastly, there was no basis in the agreement for the award of $600 in costs against the wife which was imposed over and above any retainer payment or interest. The issue of quantum of the arbitration costs was not subject to mediation or arbitration under the agreement and M. exceeded his jurisdiction in making the order. The arbitral decisions were set aside and a trial of the issues of custody and access was ordered.”

In the year 2000 when the matters involved in this case were occurring, med/arb was not a heavily used process in litigation proceedings generally. It was used in some measure in family law matters and it certainly was used in labour matters. It had not yet found its way into other areas.

It becomes apparent from a review of the case summary, that the court felt that the manner in which this matter moved between mediation and arbitration, was not appropriate and led to significant unfairness in the results in the hands of the particular mediator/arbitrator in question.

Much has changed in the last five years. For one thing, lawyers have stepped firmly into the role of mediator/arbitrator. Many of those are family law lawyers who were already mediating but were not previously arbitrating. By their training and experience, they have taken a different approach and have clearly drawn the lines between the two processes. It is probably not surprising that as a result of more structure being developed, mediation/arbitration has begun to flow over into other areas of litigation.

What are some of the changes which have occurred in these few short years that are beginning to make med/arb a more acceptable form of dispute resolution?

The process has become a two-step format; that is, the mediation is conducted and, if successful, ends the process. If unsuccessful, a separate arrangement is made for the arbitration.

There are two separate agreements; one for the mediation and, if necessary, another for the arbitration.

The mediation and the arbitration are conducted separately from one another at different times.

If the matter proceeds into arbitration, the traditional considerations respecting arbitration apply including pre-arbitration hearing or procedural agreement;

In seeking finality, the parties know that if the mediation fails, they can move without too much repeat or time loss into an arbitration with a person who is already informed.

There is cost efficiency in that the issues have already been dealt with by the mediator and are known upon moving into the arbitration process.

There are, of course, some risks in the med/arb approach. The neutral professional must be trained and experienced in both processes in order to bring fairness to the parties involved. The parties may sometimes be concerned with an arbitrator having been the mediator with whom inside secrets were shared in a mediation caucus. The parties have to trust the neutrality of the professional to fulfill not only the functions of a mediator, but if those fail to yield a settlement, then they must have equal trust in the competence and fairness of the professional as an arbitrator who is to make a final decision respecting their matters. Moreover, there is the risk that a slightly unsure party may not be prepared to disclose important matters during a mediation for fear that it might somehow taint or prejudice a subsequent arbitration.

In international matters, arbitration, particularly commercial arbitration, has been a well-known and long accepted process. Mediation is the new kid on the block, slowly gaining popularity. It will be interesting to monitor the experience over the next five years or so to see whether med/arb finds its way widely into commercial litigation and more particularly into international commercial litigation.

The Litigation Process

Almost everyone has either heard or voiced a complaint about the cost, complexity, and time delay of court proceedings in the nineties. At present, it takes at least twelve months from the time that you place your case on the list for trial until the trial is finally heard. Delays of up to two and three years are not unheard of. This is, of course, in addition to the time required to go through the proceedings prior to the placing the case on the list for trial.

As the usefulness of the Court system as a method of resolving anything but major disputes declines, the prospect of turning to a modern variation of "pistols at dawn" comes to mind. However, there is a legal alternative to a regression to our earlier days. Many people are now turning to arbitration and mediation as methods to resolve disputes in a quicker and less expensive fashion. Typically, costs are shared equally.

Arbitration

Arbitration is the resolution of a dispute through a binding decision of one or more arbitrators. The role of the arbitrator is much like that of a Judge in that he/she or they try to resolve the dispute according to the law, rather than by way of compromise. The procedure, while less confrontational than court proceedings, is clearly adversarial. There is a winner and a loser. The awards made by arbitrators are, in the normal course final and enforceable in the same fashion as a judgment of the Court.

The advantages of arbitration are numerous. First and foremost, the process can, to a certain extent be dictated by the parties. The experience of agreeing on the process often brings the parties closer on the merits of the issue between them. And the more that is agreed upon, the lower the likely cost.

Another advantage of arbitration as opposed to litigation is the preservation of some degree of the relationship between the parties. If the dispute between the parties arises from their commercial dealings, both parties may wish to try and preserve the nature of the relationship to their mutual benefit. Unfortunately, the litigation process, due to its length and expense, often pushes the parties farther apart, thereby destroying any possibility of a continuing relationship.

Unless there is a substantial amount of money involved, it is generally advisable to have only one arbitrator. The arbitrator is chosen by agreement between the parties. If no such agreement can be reached, a court application can be brought to name an arbitrator.

Once an arbitrator is named, the parties will describe his powers and duties in a jointly prepared document called a "submission." This submission will also provide that the arbitration award can be enforced by the Court, should one of the parties not comply with the decision of the arbitrator. The submission will also set forth whether or not the award of the arbitrator can be appealed. However, the courts have shown a very strong reluctance to interfere with the award of an arbitrator.

It should also be remembered that, as opposed to court proceedings, arbitrations are not public information. Therefore, when business issues which you would prefer to keep from your competition are involved, arbitration has the distinct advantage of allowing you confidentiality.

In order to take advantage of the benefits of arbitration, consideration should be given to inserting arbitration clauses in agreements being drafted today. Such clauses are most easily raised with the other party to the agreement when goodwill is at its highest; i.e. when the agreement is first being negotiated.

Mediation

Mediation is a process whereby two or more parties to a dispute use a neutral third party to assist them in reaching a settlement. The process is voluntary so that it only works if both parties are willing. It involves a negotiation where the parties themselves are present but the mediator works to facilitate settlement that the parties themselves have been unable to reach. The result does not bind the parties legally and if it does not work out, they can still take their dispute to an arbitration or to court.

By working with the parties on their underlying interests, a mediator can often achieve a result at settlement that no other form of dispute resolution can do. For example, in an arbitration, or a court proceeding, one party wins and the other party loses. Clearly, this is unsatisfactory in all cases to the loser. In a mediation there is no loser. It is a win win situation if the parties come to a settlement.

Some of the obvious advantages to mediation include speed, cost savings, and confidentiality. When a mediator is appointed by the parties, time is scheduled for the mediation, and any relevant documents are exchanged in advance. There are no formalities to argue about concerning the relevance or admissibility of documents. The parties agree on their documentation or there cannot be a mediation. The appointed time is when the mediation is heard. There is no other mediation going on before the same mediator that day. In this way, there is no delay for hearing, and you do not waste your time.

From the point of view of cost, since procedures are very informal, there are no technical delays and no appointment backups. The parties share the cost of the mediation equally. Therefore, each has a commitment to a solution that works. In many cases, the parties have a need to continue doing business together and must put a dispute behind them quickly and with mutual satisfaction. Mediation achieves this result.

From the point of view of confidentiality, the parties set their own terms of reference for the mediation. Any discussions which go on at the mediation and any involvement by the mediator are not capable of being repeated before a court in a later proceeding if the mediation fails. In this way neither party is prejudiced by what takes place in the mediation in the event of failure, and the parties have every reason to be fully frank in their negotiations.

Mediation also limits the issues in a case; that is, sometimes when a case is allowed to go on longer, additional disputes arise in the framework of the case and it becomes more complex, delayed, more lengthy and more expensive. Mediation avoids all of these problems.

Mediation has been going on for a long time but has recently come to the forefront of dispute resolution. Parties have suffered delays in the judicial system for a long time and should be aware of their alternatives.

REPRINTED WITH PERMISSION IN CORPORATE PLANNING ASSOCIATES CORPORATE COUNSEL’S INTERNATIONAL ADVISER DECEMBER 1997 ARTICLE WAS PRESENTED AT THE AMERICAN BAR ASSOCIATION

AUGUST 5, 1996PAUL JACOBS, Q.C., C.MED., C.ARB.

I would like to open with a quote from a lawyer named Lannan who practised in Calgary, Alberta during the Great Depression. This quote was made in response to a young man speaking to Mr. Lannan about the prospects of becoming a lawyer. Lannan said as follows:

"The work of a lawyer is of the most exacting nature. No mistakes are permitted him; he must always be right; he cannot be subject to the ordinary human frailties. [H]e must go through the world with a great part of that world looking on him as an unconvicted thief....

[S]o unless you have the blood of martyrs in your veins and you are prepared to devote your entire life to self-sacrifice, and to always have your motives misunderstood, your greatest efforts received with ingratitude, your legitimate accounts be treated as grand larceny, I would advise you to devote your energies to some other line of pursuit."

Lawyers are a hardy breed and we have survived another 60 years including a second Great Depression. But maybe some of us have taken Mr. Lannan's advice and have devoted our energies to some other line of pursuit.

In this connection, I am pleased to report to you that Alternative Dispute Resolution is alive and well and living in Canada.

Last year the outgoing President of the Canadian Bar Association, believing that the justice system is outmoded and overdue for change, made the following remarks:

"The Justice system must become faster, cheaper and less complicated and more responsive to the modern realities of time and technology."

As lawyers who must serve our clients' interests in a more sensitive, responsive and comprehensive way than ever, we are beginning to understand that dispute resolution outside the courts, should perhaps no longer be seen as an alternative form of dispute resolution, but as a more appropriate form of dispute resolution for many cases.

I. DEVELOPMENTS IN CANADA

I looked up the word "mediation" in the 1979 edition of the Encyclopaedia of Words, Phrases and Legal Maxims. Not surprisingly, there was no entry or definition. Things have changed rapidly since that time in Canada, and more particularly, in recent times. I want to refer you to some of the developments which have been taking place.

In Ontario, in 1994, a pilot project was undertaken for two years in Toronto and Ottawa. This project involved the opening of an Alternative Dispute Resolution Centre annexed to the Ontario Court (General Division). This is the main trial division in Ontario and comprises what used to be our County and District Courts, and the Supreme Court of Ontario. The system was applied particularly to the Commercial Court section which involves cases primarily in the area of business and commercial law. The premise was that once the issues were raised in the pleadings, the case would be referred on a mandatory basis to the ADR Centre before examinations for discovery or depositions were undertaken. Counsel were obliged to meet in advance of the ADR session with a view to try and settle the matter. If they could not, the case would proceed to the ADR Centre for mediation. There was an opportunity for opting out, but only if both counsel would sign a certificate indicating significant reasons why mediation would not work. Keeping in mind that this is a mandatory referral, I am pleased to advise that after the initial break-in period, the level of successful settlement in one meeting has been over 70%. This compares very favourably with voluntary mediations being conducted in the private sector. And I should add that initially only 1 out of 10 cases was referred, but this was increased to 8 out of 10 cases over the two year period.

The initial two year pilot project ended March 31, 1996, but was extended for a further six months by our Attorney General. I have been involved in the meetings with the Attorney General and the Chief Justice of Ontario and others in connection with the creation of an ongoing ADR Centre. At present, it is the intention of our government to create a permanent ADR aspect to our litigation stream. While the government does not wish to be responsible for funding full time mediators as has been the case during the pilot project, the plan most likely is to have an amendment made to our procedures whereby a mandatory referral will occur. It is also likely that there will be an approved roster of mediators who will have to be paid privately by the parties. This will not be unlike the costs of the Official Examiner in whose offices, examinations for discovery are conducted daily in proceedings across Canada.

I have no doubt that the experience of the American jurisdictions will be sought out in the course of putting into place this permanent system in Ontario.

I should point out that in Canadian jurisprudence, typically, Ontario and British Columbia are the most progressive leadership provinces and the places where most business is conducted, and so it is to be expected to find these developments taking place in these jurisdictions first in Canada. Others will likely follow.

There are a range of processes that have been available at the ADR Centre in Toronto. These have included Mediation, Early Neutral Evaluation, Mini Trial and Summary Jury Trial.

I am certain everyone is familiar with the mediation process and I am happy to report that the process that is followed at the Centre, and by most trained private mediators, is the model which is taught at Harvard and at CDR in Boulder, Colorado. In fact, my own training is from both centres.

Early Neutral Evaluation is a process in which a judge of the court or a dispute resolution officer evaluates the relevant strengths and weaknesses of the positions advanced by the parties, and the proper outcome at trial, and advises the parties accordingly. In these sessions, counsel present the core of the case in the presence of the parties and the neutral evaluator gives an assessment of the strengths and weaknesses of the case of each of the parties afterwards. This process has been very effective where used, but its use has been relatively low so far. I believe that as counsel begin to understand the value of this concept more, and begin to have more faith in ADR generally, there will be significantly increased use of Early Neutral Evaluation.

In our jurisdiction, the Mini Trial is a process in which opposing counsel present their best case to the parties and to a Judge of the court who moderates the presentations and renders a non-binding opinion as to the proper resolution of the dispute after trial. One interesting feature of the Mini Trial is the fact that counsel are presenting the case to the other party as well as to a Judge. This is an early opportunity to make an effective presentation to the other party in the case, and counsel have begun to realize what a great opportunity it is to be able to attune the other party to your client's interests on a more common ground basis than in an adversarial setting. Again I expect a significant increase in the use of the Mini Trial in Canada.

Summary Jury Trial is a procedure connected to the formal litigation process and is available once the case is ready for trial. It is most typically advantageous in large complex cases that are expected to be very lengthy trials. The counsel for the parties present their best cases to a real jury. The jury is not advised that the trial is not a real one. However, the presentation is an abbreviated one so that it lasts only one or two days. There are no outside witnesses called. The business principals with authorization to settle are the parties who attend the trial. A judge presides over the summary jury trial. The jury renders a non-binding verdict. This becomes a starting point for negotiations in order for the parties to achieve settlement without the need for the complex trial.

I am happy to report that Canada is moving quickly into the 21st century at the corporate level as well. In particular, you will all be familiar with CPR in New York. Similar efforts are now being made in Canada by many commercial organizations which have joined the Canadian Foundation for Dispute Resolution, a similar type of organization. While the warrior mentality litigators may still exist, it is clear that corporate counsel have attuned their minds to more appropriate ways of seeing their companies' disputes resolved.

II. ARBITRATION

Let me turn for a few moments to private arbitration. In Canada, such arbitration has gone on since early this century. The provinces all have Arbitration Acts which are quite simple and straightforward. Arbitrations are often resorted to in commercial matters pursuant to clauses inserted in the original agreements between parties. Historically, there have been very few statutory approaches for or requirements for arbitration.

In Ontario the only legislated forms of arbitration exist under the Ontario Labour Relations Act, which is, of course, a very old statutory format for arbitration, and more recently, under the Insurance Act at the Ontario Insurance Commission. This latter format was developed in 1990 when our tort system for motor vehicle accidents went virtually completely no-fault. And that is not to say that cases do not still go through the court system. They do. However, there are prescribed procedures under the revised legislation which must go through mediation and arbitration processes, either solely or before going to court. The Ontario Insurance Commission has become an exceedingly busy place in the last half a dozen years.

There are also industry related formats of arbitration in many areas. I myself sit on one national arbitration plan in the motor vehicle field, and one provincial panel in the agricultural field.

III. INTERNATIONAL ARBITRATION

Prior to 1985, in Canada there was no special legislation with respect to interna­tional arbitration. The Provinces applied their Arbitration Acts generally (these were based upon the provisions of the U.K. Arbitration Act of 1889) to all kinds of arbitration whether it was domestic or international, commercial or non-commercial.

Although every Province had its own Arbitration Act, these Acts were all different; i.e. there was no Uniform Law. The reason for this was that the Canadian Constitu­tion did not provide for uniformity of Acts on matters of provincial jurisdic­tion. In Canada, arbitration whether international or not, had always been a matter of provincial jurisdiction.

IV.WHY DID CANADA NOT ACCEDE TO THE NEW YORK CONVENTION UNTIL 1986?

As you know, Canada's major trading partners, the USA and the UK, did not accede until 1970 and 1975, respectively. So, the economic pressure was not very strong and this general apathy was combined with technical problems:

The Convention contained a "federal state clause" in Art. XI (b) providing that where the national government of a contracting state does not have the constitu­tional jurisdiction to implement all parts of the Convention, it must bring the terms of the Convention that it cannot implement to the attention of the govern­ments in the country that can do so and recommend that they do implement those provisions.

The federal authority to implement the Convention was not clear, because the provisions of the Convention relate to administration of justice within the prov­ince, a matter of provincial jurisdiction under the Constitution Act. Since the Convention did not provide partial implementation by a contract­ing state, the federal govern­ment hesitated to accede to the Convention without unani­mous provincial implementation.

Let me add that another factor in Canada's decision to act in the international arbitration field may also have been the fact that UNCITRAL adopted the Model Law of Inter­national Commercial Arbitration on June 21st, 1985. Canada had partici­pated in drafting this Law. It was available to any jurisdiction that wanted it. It might have been the necessary "kick-start" needed to push the matter forward.

V. LEGISLATION FROM 1985 TO PRESENT

Efforts at legislation were made by the federal Minister of Justice who brought the matter forward at regular meetings of the federal and provincial Justice Ministers in 1985. Ultimately, the provinces all agreed in principle to implement the Convention.

In August 1985, the Uniform Law Conference of Canada adopted a short form Uniform Act called the "Uniform Foreign Arbitral Awards Act" declaring the Convention to be in force. This Act provi­ded that the rules of the Conven­tion were to be applied only to commercial arbitra­tions and to awards made in other contract­ing states. In December 1985, British Columbia adopted the Uniform Act.

In May 1986 the Uniform International Commercial Arbitration Act adopted the provisions of the UNCITRAL Model Law and the provisions of the Conven­tion. At that time, the Uniform Foreign Arbitral Awards Act was merged with the provisions of the Model Law because no other province except B.C. had implemented the Convention at that time.

From May 1986 to December 1986 almost all provinces and the two territories imple­mented both the Conven­tion and the Model Law following the lead of the Federal Government. By 1988, in time for the advent of the Free Trade Agreement, the Convention and Model Law were implemented in every province of Canada.

VI. INTERNATIONAL ARBITRATION IN NAFTA

Art. 2022 is entitled "Alternative Dispute Resolution" and provides in its first paragraph that each of Canada, USA and Mexico "shall, to the maximum extent possible, encourage and facilitate the use of arbitration and other means of ADR for the settlement of international commercial disputes in the free trade area." An Advisory Committee on Private Commercial Disputes has been estab­lished with each of Canada, Mexico and the USA having ten serving members. The Commit­tee is to provide recommendations respecting the availability, use and effective­ness of arbitration and other procedures.

It is believed that article 2022 in NAFTA is unique in international trade agree­ments. A colleague tells me he is developing the first case in this area in Canada, but won't provide the details as yet. On a personal note, my information from the Advisory Committee is that mediation is being considered as the favoured mechanism. We shall see.

VII. INSTITUTIONS FOR INTERNATIONAL COMMERCIAL ARBITRATION IN CANADA

On May 12, 1986, the International Commercial Arbitration Centre in Vancouver was opened. On January 15, 1987, the second centre was opened in Quebec City. It is interesting to note that very few international arbitrations have gone on in Quebec City and that Vancouver has been averaging about one or two a year (although numerous domestic and private arbitrations are conducted there). While that was not unexpected in the immediate years following implementation of the Model Law in Canada, one begins to wonder in the 1990's why there has not been more activity. On a personal note I took notice back in 1986 that no centre was opened in Ontario. That was curious having regard to the fact that Toronto is the commercial heart of Canada and Ottawa is the national capital and both are in Ontario. One would have thought it logical that one of these cities would have been chosen as an international commercial arbitration centre. On the other hand, both cities had a reputation as being centres for significant aggressive commercial litigation and may be it was considered that the softer approach of ADR was not appropriate in such centres. If that is the case, a lot has changed in ten years. Toronto, in particular, has a very respectable number of well-trained arbitrators today.

As we speak, another centre was to be opening in Windsor, Ontario. This one is called the Dispute Resolution Institute of North America or DRINA. It was planned to offer mediation and conciliation services in connection with the University of Windsor and, of course, with a view to handling free trade related agreements. It is noted that Chrysler Canada has its national headquarters and major manufacturing plant in Windsor, Ontario, and, of course, this is immediately contiguous to Detroit. It was also established later than the Commercial Arbitration & Mediation Centre for the Americas (known as CAMCA), which was established by the International Chamber of Commerce in Mexico City for similar purposes. The parties are, of course, free to select in their own agreements, the rules to be followed in arbitrations. These may include those of the International Bar Association, the International Chamber of Commerce or the American Arbitration Association.

VIII. HOW HAVE THE CANADIAN COURTS BEEN DEALING WITH INTERNATIONAL ARBITRATION

It appears that the Canadian courts have been ready from the beginning to encourage international arbitration. This is strictly with respect to arbitration and submission agreements as well as the enforcement of Foreign Arbitral Awards. They rarely intervene, rather they give respect to the parties' agreements and arbitral awards as a matter of public policy.

In Quintette Coal v. Nippon Steel Ltd., the British Columbia Court of Appeal said "it is meet therefore, as a matter of public policy to adopt a standard which seeks to preserve the autonomy of the forum selected by the parties and to minimize judicial intervention when reviewing International Commercial Awards in British Columbia".

It is considered contrary to public policy not to give effect to arbitral submissions and to enforce a foreign arbitral award except on very limited grounds found in Sections 35 and 36 of the model law.

In the case of Schreter v. Gasmac Inc., the Ontario Court (General Division) commented, "...if this court were to endorse the view that it should reopen the merits of an arbitral decision on legal issues decided in accordance with the law of a foreign jurisdiction, and where there has been no misconduct, under the guise of ensuring conformity with the public policy of this province, the enforce­ment procedure of the Model Law could be brought into disrepute."

Concerning arbitration submission agreements, in the case of BWV Investments Ltd. v. Saskferco Products Inc., the Saskatchewan Court of Appeal held that the role of the court is to apply the law in a manner that would uphold the objectives of the Model Law, and that it would constitute a violation of the strong public policy of International Commercial Arbitration to fail to do so. A similar approach has been taken in the Alberta Court of Appeal in the case of Kaverit Steel v. Kone Corp.

Lastly, I want to refer to the first case involving an international arbitration agreement which has reached the Supreme Court of Canada. In the case of Canadian National Railway v. Burlington Northern Railroad, leave to appeal to the Supreme Court of Canada was granted on March 7th, 1996. This is a matter which had arisen in British Columbia where a party to an arbitration agreement had commenced legal proceedings in court against the other party to the agreement. The other party had applied to the court to stay proceedings. The question is whether the arbitration agreement is inoperative on the basis of a party's refusal to comply with the agreement.

As I have said, it seems that Canadian courts have been keeping their hands off arbitral decisions generally, across the country. This would seem to indicate that the courts are very much in favour of allowing ADR to find its own level within our system of justice.

This development is not unlike that which has occurred in the United States. Very recently, I was in Washington, D.C. where I addressed an international association of lawyers on ADR. At that conference, Justice Sandra Day O'Connor of the U.S. Supreme Court, made an address and in the question period I asked her how her court viewed ADR in the scheme of dispute resolutions at large, and as an available service within the justice system. Justice O'Connor's response was very positive. She indicated that the Supreme Court of the United States favours Alternative Dispute Resolution; that it has been working very successfully in the federal system in the United States, and that this was true right up through the appellate level.

IX. CANADA AS A FORUM FOR INTERNATIONAL ARBITRATION

I think it is fair to say that Canada is recognized in the international community as a stable country, one which has had a major peacekeeping role, and one which is in support of human rights both domestically and abroad. As such Canada has been seen as a source of impartiality and fairness.

From the point of view of dispute resolution more particularly, Canada and the United States share a common language, principles of common law, and similar cultures.

Recently, I had a call from a lawyer in San Francisco who is acting for a California company which had become embroiled in a dispute with an Irish company. He was speaking to me about the prospect of Toronto as a venue for an international arbitration. He recognized all of the considerations which I have just raised in addition to making reference to Canada's physical convenience and reputation for neutrality internationally. I know his views were correct and I hope that more of you will find that Canada's reputation for neutrality and justice will recommend it as the ideal candidate for ADR matters which arise in your clients' affairs.

Alternative Dispute Resolution (ADR) is becoming an increasingly popular way to resolve legal disputes. ADR refers to a series of procedures that present an alternative to the traditional court system. It can settle disputes faster and usually with less hostility than the courts, and it can be used to resolve endless types of disputes.

Imagine, for example, that you have a dispute with a major supplier and that it is based on a product or service. The dispute is definitely between your two companies and may even be between individuals. You have been doing business with this company for years and would expect to continue doing business with them were it not for the dispute.

Should you sue? You know how long lawsuits can take – the delays in the courts are infamous. Everyone complains that the cost of lawsuits is too high, and after a lot of frustration and expense, the two sides can become even more entrenched in their positions, and less willing to work out a settlement. The case can go to trial with a Judge who isn’t attuned to the industry or the specific problem. The trial is public. After the long struggle businesses experienced during the recession, most people are not interested in getting into another struggle with a lawsuit.

A joint effort

The alternative to a long, drawn-out trial is one of the forms of ADR, which share in common the willingness of the parties to try to resolve their differences. The case can be scheduled quickly, and since it will be the only case before the mediator or arbitrator at the appointed time, it will proceed when scheduled. The parties usually share the cost. They agree in advance on the issues to be submitted and the terms of reference with which the procedure will be governed, and choose the neutral person who will help in the process.

In other words, with ADR, you make your own rules. You pick a facilitator, mediator or arbitrator who knows the field. The procedure is held in a confidential setting, and the results are private. There are no lengthy rules or court procedures to slow down the process.

ADR is used successfully to resolve a myriad of disputes, including commercial transactions, shareholder disputes, joint ventures, partnerships, disputes between franchisor and franchisee, customer and supplier disputes, and even breakdowns in family business relations.

The range of options offer a number of different processes, including:

Principled negotiation

Neutral case evaluation

Mediation

Arbitration

Combination mediation-arbitration

Mini trials

This list is not exhaustive; other procedures are used, and some of the above can be combined or, in cases when the first type of ADR doesn’t work, others may be acted upon.

Some time ago, IBM and Fujitsu submitted for arbitration a case that had been in the courts for years. It was resolved in a matter of months through ADR, even though it involved hundreds of millions of dollars. Both parties were able to get on with their business.

If ADR sounds too good to be ture, I assure you, it is not. Mediation, arbitration and other forms of ADR are available to everyone. It is simply a matter of knowing they are available and being willing to use them.

ARTICLE PUBLISHED IN THE

Last year I wrote an article entitled “Confidentiality in Mediation – Right or Risk”. That article examined some cases which had been decided in Ontario over the two years preceding the article. At that time I directed attention among other cases to the case of Rudd v Trossacs Investments Inc. In an interlocutory decision, the Judge on a motion ordered the mediator to give evidence related to the mediation despite a Mediation Agreement containing a confidentiality clause and a non-compellability clause respecting the mediator’s recollection and notes.

At that time, I was Chair of the Ontario Bar Association Section on Alternative Dispute Resolution and I and my Executive were sufficiently disturbed by the decision compelling a mediator to testify, that we took steps to have the Ontario Bar Association seek intervenor status on an appeal which was filed.

In interlocutory matters in Ontario, the rules provide for an appeal to the Divisional Court. This court is composed of three judges of the Superior Court of Justice and is for all intents and purposes a Court of Appeal. It was necessary first therefore, to seek leave for an order granting the Ontario Bar Association intervenor status and that motion was brought at the same time as the motion for leave to appeal to the Divisional Court.

Because of the importance of this issue, in the absence of statute or rule of practice at the time in Ontario, it was essential to have case law preserving the right of the parties to confidentiality in mediation. For that reason, I am setting out below the decision of Justice Howden granting leave to appeal and granting intervenor status to the Ontario Bar Association. His Honour notes that this is the first case dealing with the exception to mediation confidentiality.

"March 7, 2005

"1) On motion by Ontario Bar Association, order to go in terms of para (p.2) of Notice of Motion for leave to intervene. The O.B.A. is an organization of lawyers, law students and judges with a genuine and substantial interest in the confidentiality and exceptions to confidentiality issues raised in this proposed appeal. This organization, several hundreds of whose members are in the ADR section and all of whose members will or may be affected by the outcome of this appeal, can make a useful and distinct contribution.

"2) As to the Motion for Leave to Appeal, I find that the decision of Lederman J. conflicts in the principles not applied where a confidentiality agreement is in effect and in the reasoning process and conclusions in Porter v. Porter (1983), 40 O.R. (2d) 417 (U.F.C.); Davidson v. Richman, [2003] O.J. No. 519 (S.C.J.); Bard v. Longevity Acrylics Inc., [2002] O.J. No. 1373 (S.C.J.) and Pearson v. Pearson, [1992] Y.J. No. 106 (S.C.Y. Terr.). The principle applied by Lederman J. derives from the "without prejudice" rule and not from the strict analysis required by Wigmore's 4 fundamental conditions for confidentiality privilege, despite the sessions of mandatory mediation being subject to the confidentiality agreement. "It is desirable that leave be granted because any added exceptions to the confidentiality principle in mediation will arise again, and as compelling testimony by order is per se an interlocutory matter there is no other way for the issue to be determined. "In addition, I find that subrule (b) of 62.04 is also met. I do not necessarily believe that the decision in question is wrong but I have doubt in its correctness because it requires a mediator to in effect cast a tie-breaking vote in a case where he wrote the agreement during the latter stages of the mediation session with input from counsel. (See O.V. Gray, "Protecting the Confidentiality of Communications in Mediation" (1998) 36 Osgoode Hall L.J. 667; G. Adams, Mediating Justice (2003) pp. 299-300.) "The public importance of this (as the first decision re: exception to mediation confidentiality known to counsel who appeared before me) issue in respect of the expectation and significance of confidentiality in mandatory mediation is, I think, self evident. "As to Mr. Pitch's undertaking not to question the mediator beyond one question - was Kaiser a party to the agreement - the order appears to allow more and whoever "loses" when the mediator answers, will have to insist on the full extent of the order. "Beyond these findings, where counsel and a legally trained mediator draw an agreement and it is signed by or on behalf of all parties, and that was easily determinable at the session, it seems to detract from the court's role to bring finality to disputes to go any further than the agreement itself, on which motion for judgment can be brought without further parol evidence. For any claim arising from the signing of the mediation agreement, there is errors and omissions coverage. "Apart from the final comment above, for the foregoing reasons leave to appeal is granted as asked. Costs are reserved to the hearing of the appeal. Time to appeal is extended to March 31, 2005 on consent."

"[signature of judge]"

"(Howden, J.)"

The appeal was heard in December 2005 before a panel of three judges of the Divisional Court. The decision was reserved and ultimately released on March 9, 2006. This decision is very important because it is now the law of Ontario. The case has not been appealed to the Ontario Court of Appeal. The decision of the court was unanimous. Further the decision of the court was thoroughly reasoned and made reference to four principles from Wigmore on evidence which are generally known as the Wigmore rules with respect to privileged communications. These rules were set out in the case of Slavutych v Baker which is a decision of the Supreme Court of Canada in 1975. These rules were very important to the decision made in the Divisional Court. The decision sets out the four rules clearly and then analyzes them in a very systematic fashion. The analysis of the fourth principle is particularly compelling.

Because of the importance of this decision, I am setting out the reasons in their entirety.

Harvin D. Pitch and Matthew Sokolsky, for the Plaintiffs (Respondents)

Paul Dollak, for the Defendants (Appellants)

- and -ONTARIO BAR ASSOCIATION Intervenor

Ian D. Kirby, for the Intervenor

)

HEARD at Toronto: December 8, 2005

SWINTON J.:[1] This appeal raises the important issue whether a mediator who conducted a mediation pursuant to rule 24.1 of the Rules of Civil Procedure can be compelled to give evidence as to events which took place during the course of such mediation.

[3] The Respondents (Martin Rudd, Gordon Sawa, William Crysdale, Violet DiCecco and Peter Edwards) were investors in a limited partnership. They were represented by counsel Garth Low in this action, in which they sued the general partner and various related or associated companies and their principal Morris Kaiser, as well as the investors’ accountants. [4] In 2003, Morris Kaiser brought a motion for summary judgment to dismiss all the claims against him personally. The motion was not opposed when brought before Himel J., and on September 23, 2004, she dismissed the action against Mr. Kaiser and ordered the plaintiffs to pay him costs of over $39,000. [5] After receiving correspondence from Mr. Low suggesting that she had made a clerical error in calculating costs, Himel J. invited further submissions. While she considered those submissions, the litigation continued between the other parties. [6] The parties commenced mandatory mediation on January 12, 2004 and continued on January 28, 2004. A mediation agreement was executed prior to the start of the mediation. It contained a confidentiality clause in the following terms:

2. Confidentiality The parties agree that all communications and documents shared, which are not otherwise discoverable, shall be without prejudice and shall be kept confidential as against the outside world, and shall not be used in discovery, cross examination, at trial, in this or any other proceeding, or in any other way. The mediator’s notes and recollections cannot be soepenaed (sic) in this or any other proceeding.

[7] Mr. Kaiser was present at the first mediation session. The Appellants claim that he was there in his capacity as an officer, director, or signing officer of the remaining defendants. [8] A settlement was reached on January 28, 2004, a date on which Mr. Kaiser was in attendance by telephone. The terms of the settlement were drafted by the mediator with input from counsel. The terms are set out in Minutes of Settlement that are largely handwritten. However, they are headed by the typed style of cause of the action, cut from another document and attached to the Minutes of Settlement. Mr. Kaiser’s name is included, as he is one of the named defendants in the action. [9] The terms of the settlement are handwritten and state:

The Plaintiffs William Crysdale, Peter Edwards, Martin Rudd & Gordon Sawa (the “Plaintiffs”) and the Defendants signing below agree to settle the within action and counterclaim on the following terms:

1.) Each of the Plaintiffs shall pay to the Defendants the amount of $32,000.00 all inclusive of all claims, interest, costs, GST & disbursements payable to Paul Dollak in trust. 2.) The Plaintiffs & the Defendants shall execute mutual releases in a form satisfactory to counsel. 3.) The action & counterclaim respecting the Plaintiffs herein shall be dismissed without costs.

This was dated January 28, 2004, and the names of the plaintiffs were written in, and they signed.

[10] The names of the following defendants were in typed form, cut from another document by counsel for the defendants, Mr. Dollak, and inserted: Trossacs Investments Inc., Fanlon Services Inc., Trossacs Associates, Kaimor Management Ltd., Trossa Holdings Inc. and 645262 Ontario Limited. Mr. Dollak then signed as counsel on their behalf. Mr. Kaiser’s name is not included among the signatories. [11] A “Settlement and Mutual Release” was executed separately by each of Mr. Low’s clients, including Ms. DiCecco. For example, Mr. Rudd signed on February 12, 2004, while Mr. Crysdale signed on February 16, 2004. Both signatures were witnessed by Mr. Low. The parties of the second part were the defendants named in the Minutes of Settlement. Mr. Kaiser’s name does not appear, although he signed each Settlement and Mutual Release on behalf of the named defendants. [12] An order was obtained from the Superior Court of Justice dismissing the action against these same named defendants on February 19, 2004. [13] On March 5, 2004, Himel J. released her amended costs order from the summary judgment motion. In it, she reduced the costs payable to Mr. Kaiser to just over $21,000. [14] When counsel for Mr. Kaiser sought to enforce the revised costs order, Mr. Low alleged that he had made a mistake and never noticed that Mr. Kaiser had not signed the settlement documents in his personal capacity. Mr. Low then brought a motion seeking an order to compel the mediator to testify about communications at the mediation, for rectification of the Minutes of Settlement and for enforcement of the settlement. [15] The motions judge, Lederman J., gave his decision on July 8, 2004, ordering that the mediator could be examined as a witness on the pending motion. At para. 23 of his reasons, he stated:

Accordingly, an order will go permitting the examination of the mediator as a witness on the pending motion with the questions being limited to his knowledge and understanding, if any, as to whether Kaiser was or was not a party to the settlement agreement that was arrived at in the mediation.

[16] The motions judge discussed the common law principle that settlement discussions are privileged. He also made reference to the parties’ confidentiality agreement. He then went on to say that once a settlement has been reached and its interpretation is in question, it may be necessary to disclose mediation discussions to ensure substantive justice. However, he stated that privilege and confidentiality should not be lightly disturbed and continued at paras. 20 to 22:

Some evidence must be adduced on the motion to demonstrate that the mediator’s evidence is likely to be probative to the issue and that the benefit to be gained by the disclosure for the correct disposal of the litigation will be greater than any injury to the mediation process by the disclosure of discussions that took place. In the instant case, there is evidence that the mediator himself drafted the minutes of settlement in his own handwriting with input from counsel and, therefore, is in a position to provide important information as to whether the minutes of settlement as executed are inconsistent with any prior oral agreement of settlement among the parties. If, indeed, the omission of Kaiser’s name from the minutes of settlement was mere inadvertence, as the plaintiffs contend, it would be of benefit to the court to have the evidence of the mediator on this issue in order to prevent a possible miscarriage of justice. Any impairment to the mediation process would be minimal in this case.

[17] Leave to appeal this decision was granted by Howden J. on March 7, 2005. He also made an order granting intervenor status to the Ontario Bar Association.

The Issues

[18] The Appellants argued that the motions judge erred by dealing only with settlement privilege and failing to consider whether there is a general mediation privilege or a privilege protecting mediators from testifying based on the Wigmore principles. In addition, they argued that the confidentiality agreement between the parties bars the testimony of the mediator. Finally, they argued that the evidence was neither relevant nor admissible, because of the parol evidence rule and because a settlement at mediation is enforceable only if in writing. [19] The Intervenor supported the Appellants’ position that discussions with the mediator are privileged at common law, and the motions judge was in error in ordering the mediator to testify. [20] The Respondents took the position that the motions judge correctly concluded that the mediator’s evidence was necessary to prevent a miscarriage of justice.

Analysis

[21] Rule 24.1 of the Rules of Civil Procedure deals with mandatory mediation in civil matters. The purpose of the rule is set out in rule 24.1.01: This Rule provides for mandatory mediation in case managed actions, in order to reduce the cost and delay in litigation and facilitate the early and fair resolution of disputes. The nature of mediation is described in rule 24.1.02 as a situation in which “a neutral third party facilitates communication among the parties to a dispute, to assist them in reaching a mutually acceptable solution.” [22] Rule 24.1.14 of the Rules of Civil Procedure states that all communications at a mediation session and the mediator’s notes and records are deemed to be without prejudice settlement discussions. In Rogacki v. Belz 2003 CanLII 12584 (ON C.A.), (2003), 67 O.R. (3d) 330 (C.A.), Borins J.A. (Armstrong J.A. concurring) concluded that the rule codified the common law principle that communications made in an attempt to settle a dispute are inadmissible in evidence “unless they result in a concluded resolution of the dispute” (at para. 18). [23] The issue in that case was the availability of a contempt order against a party who had published the content of confidential discussions during mediation. The Court of Appeal held that such an order was not available. [24] The motions judge interpreted the words of Borins J.A. to mean that mediation privilege is not absolute. He then went on to say that if settlement discussions result in an agreement, communications are admissible evidence if the existence or interpretation of the agreement is in issue (at para. 14). [25] The Court of Appeal in Rogacki did not deal exhaustively with the issue of privilege for communications in mediation, as the issue before it was the availability of a contempt order. While the majority discussed rule 24.1.14, they never addressed the common law principles relating to privilege. [26] Common law principles have recognized a privilege for confidential communications in certain important societal relationships. In Slavutych v. Baker (1975), 55 D.L.R. (3d) 224, the Supreme Court of Canada held that the four conditions from Wigmore on Evidence should be applied to determine whether communications are privileged (at 228):

(1) The communications must originate in a confidence that they will not be disclosed. (2) The element of confidentiality must be essential to the maintenance of the relationship in which the communications arose. (3) The relationship must be one which, in the opinion, of the community ought to be “sedulously fostered”. (4) The injury caused to the relationship by disclosure of the communications must be greater than the benefit gained for the correct disposal of the litigation.

[27] In Slavutych, the Court held that a document submitted in a university tenure process was privileged - in part because the document was labelled “confidential”, and in part because of the importance of confidentiality in the tenure process, where individuals are asked to give their frank opinion of colleagues. [28] In M.(A.) v. Ryan1997 CanLII 403 (S.C.C.), (1997), 143 D.L.R. (4th) 1 (S.C.C.), the Supreme Court reaffirmed the approach in Slavutych, making it clear that privilege is to be determined on a case by case basis (at para. 20). In addition, McLachlin C.J.C., writing for the majority, stated that there could be circumstances of partial privilege (at para. 37):

My conclusion is that it is open to a judge to conclude that psychiatrist-patient records are privileged in certain circumstances. Once the first three requirements are met and a compelling prima facie case for protection is established, the focus will be on the balancing under the fourth head. A document relevant to a defence or claim may be required to be disclosed, notwithstanding the high interest of the plaintiff in keeping it confidential. On the other hand, documents of questionable relevance or which contain information available from other sources may be declared privileged. The result depends on the balance of the competing interests of disclosure and privacy in each case.

[30] In this case, the motions judge failed to conduct an analysis based on the Wigmore conditions. Instead, he focussed solely on without prejudice settlement privilege. In so doing, he erred. [31] In this case, it is clear that the communications to the mediator originated in confidence and, therefore, the first Wigmore condition has been satisfied. The parties to this mediation signed a confidentiality agreement, which expressly stated that the communications at the mediation were to be confidential. More importantly, the parties agreed that the mediator’s notes and recollections could not be subpoenaed in this litigation. [32] The second condition requires a determination that confidentiality of communications during the mediation is essential to the functioning of the mediation process in which the parties were engaged. In order for mediation to succeed, parties must be assured of confidentiality, so that discussions can be free and frank. The following quotation from Owen V. Gray provides a useful summary of the reasons that confidentiality is vital to the operation of the mediation process (from “Protecting the Confidentiality of Communications in Mediation” (1998), 36 Osgoode Hall L.J. 667 at 671):

The mediator encourages the parties to be candid with the mediator and each other, not just about their willingness to compromise, but also and especially about the needs and interests that underlie their positions. As those needs and interests surface, the possibility of finding a satisfactory resolution increases. The parties will be wary and guarded in their communications if they think that the information they reveal may later be used outside of the mediation process to their possible disadvantage. When they have resorted to mediation in an attempt to settle pending or threatened litigation, they will be particularly alert to the possibility that information they reveal to others in mediation may later be used against them by those others in that, or other, litigation. The parties may also be concerned that their communications might be used by other adversaries or potential adversaries, including public authorities, in other present or future conflicts. The possibility of prejudice to legal rights, or of exposure to legal liability or prosecution, may not be a party’s only concern. Parties may also be concerned that disclosure of information they reveal in the mediation process may prejudice them in commercial dealings or embarrass them in their personal lives. Accordingly, mediation works best if the parties are assured that their discussions with each other and with the mediator will be kept confidential.

[33] The third Wigmore condition requires a determination whether the relationship in which the communication is given is one which should be “sedulously fostered”. The Rules of Civil Procedure require mandatory mediation of many civil disputes in order to assist the parties in arriving at settlement and thus reduce the costs of litigation. There is clearly a significant public interest in protecting the confidentiality of discussions at mediation in order to make the process as effective as possible. [34] That brings me to the fourth stage of the Wigmore test, where it is necessary to balance the public interest in disclosure against the interest in preserving the confidentiality of communications during the mediation process. In this case, the Respondents seek to examine the mediator as a witness on a pending motion in which they seek rectification of the written settlement agreement. The remedy of rectification rests on proof of a common intention to agree to terms different from those in the signed document (Stephen Waddams, The Law of Contract, 5th ed. (Aurora: Canada Law Book Ltd., 2005) at pp. 232-4). While evidence relevant to the issue of mistake and the parties’ intention is available from the parties themselves, the mediator is being asked to give evidence as, in effect, a tiebreaker. [35] The motions judge was of the view that the disclosure of the settlement discussions would not undermine the mediation process, since the disclosure is “sought not as an admission against a party’s interest, but solely for the purpose of determining the specific terms of an agreement that both parties have arrived at” (at para. 19). [36] It is true that the mediator’s evidence might be of some assistance in determining the terms of the settlement. However, it is not the only evidence available on the scope of the parties’ agreement. Both the parties and their counsel can give evidence of what the agreement was. Indeed, it is the intention of the parties that is key to the resolution of the motion for rectification. [37] Weighing against disclosure is the fact that the parties entered into a confidentiality agreement in which they agreed not to make the mediator a witness. This is not a case where the parties, by their confidentiality agreement, seek to block a third party’s access to information that is important for the resolution of a case. Here, the parties agreed on the rules for the mediation, which included confidentiality and non-compellability of the mediator. Absent an overriding public interest in disclosure, their agreement should be respected. [38] The motions judge concluded that the potential harm from disclosure was minimal because the parties had reached a settlement. In doing so, he assumed that the reason for the privilege was to protect parties from disclosure of admissions against interest during the mediation process. However, as set out in the earlier quotation from Mr. Gray’s article, confidentiality is important not only because parties may make admissions against interest. Parties may also reveal information to a mediator which they wish to keep confidential even after a settlement is reached, perhaps because the information is private, or because it may injure a relationship with others. [39] The ability of parties to engage in full and frank disclosure is fundamental to the mediation process and to the likelihood that it will lead to resolution of a dispute. There is a danger that they will be less candid if the parties are not assured that their discussions will remain confidential, absent overarching considerations such as the revelation of criminal activity. [40] Moreover, there is a danger that a mediator will lose the appearance of neutrality if required to testify in proceedings between the parties. In her concurring judgment in Rogacki, supra, at para. 37, Abella J.A. discussed the importance of confidentiality, quoting from Jonnette Watson Hamilton, “Protecting Confidentiality in Mandatory Mediation: Lessons from Ontario and Saskatchewan” (1999), 24 Queen’s L.J. 561 at 574:

In any process forced upon parties, they must have confidence in the integrity of the process and those who have a major role in it. One of the results of requiring mediators to testify or produce documents may be a perception that the mediator, the program or the process itself does not keep confidences. While such a perception might normally cause parties to avoid mediation, they cannot do so where it is mandatory. They might, however, treat mediation as a mere formality.

[41] The motions judge found that any impairment to the mediation process would be minimal since the mediator would only be asked about the terms of the agreement. However, it is unlikely that the questions to the mediator could be restricted to a narrow question of who the parties were meant to be in the Minutes of Settlement. Indeed, it is likely that the questions to the mediator would open up discussion of the course of negotiations in order to determine the scope of Mr. Kaiser’s role. [42] The fourth condition of the Wigmore test requires a balancing of the public interest in disclosure against the public interest in preserving the confidentiality of the relationship at issue. In this case, there is an important public interest in maintaining the confidentiality of the mediation process that, in all the circumstances of this case, outweighs the interest in compelling the evidence of the mediator.

Conclusion

[43] The appeal is allowed, and the order of the motions judge is set aside. If the parties cannot agree on costs of the appeal and leave to appeal motion, the Appellants may make written submissions within 21 days of the release of this decision, with the Respondents making submissions within 14 days thereafter. [44] At the end of the hearing, the Intervenor indicated that it would not be seeking costs and asked that costs not be awarded against it. Given the assistance provided to the Court by the Intervenor, no costs are awarded against it. Released: March 9, 2006

The court leaves no doubt as to the importance of confidentiality in the mediation process. Subject to matters such as fraud or other criminal situations, it is clear that the court emphasizes that confidentiality is necessary in order for mediation to be successful.

It is worth noting that this was a case where the mediator drafted the Minutes of Settlement and I think that after reading this case, everyone would agree that it is best to leave the drafting of Minutes of Settlement to counsel. The mediator may review the Minutes of Settlement and make some suggestions, but should never be the draftsman. Equally, it is important to have a Mediation Agreement between the parties which includes a confidentiality clause. There was nothing wrong with the clause in this case; it was just that the first judge did not consider it as important as the public interest in substantive justice. Clearly, the court on appeal disagreed.

For jurisdictions which have no statute and no rules governing confidentiality in mediation, it will be necessary to look to the case law. In an area as relatively new as mediation is, there is likely to be little case law available. For those jurisdictions particularly, it was thought to be worthwhile to reprint the body of the decision in this important case in Canadian jurisprudence.

Ten years ago the final report of Civil Justice Review in Ontario was issued. One year earlier the first report set out a “blue print” for a civil justice system intended to meet certain criteria which had been established. Those were fairness, affordability, accessibility, timeliness, accountability, efficiency and cost effectiveness and a streamlined process and administration.

Extrapolating from that report, there was reference to three procedures which were to assist in meeting the seven goals set out above. These three procedures were pre-trials, settlement conferences and trial management conferences.

The pre-trial was to consider the possibility of settlement and of obtaining admissions, of simplifying issues and addressing liability, of quantifying damages, and then estimating trial times, advisability of using experts, fixing dates and so on. The pre-trial, of course, was conducted by the judge with counsel, and sometimes clients, present.

By comparison, settlement conferences were held with judge and counsel with a view to attempting to resolve the dispute or parts of it. The intention was that interest-based mediation, and rights-based pre-trial directions, might come from the judge. Of course, the extent of the mixture would depend on the skill, training and experience of the judge and the counsel involved. The settlement conference was necessary before a case was put on a trial list. Mediations became mandatory and would be conducted by private mediators.

The trial management conference was a new concept in Ontario and was focused on exchange of witness lists, agreed statements, chronologies, admissions, and document briefs. These were conducted by judges.

Civil Justice Review in the 1990’s reported that it was necessary for judges alone to perform these functions and that judicial support officers with proper training might be able to participate in some settlement conferences and trial management conferences.

That system was implemented but it was tied to a system of case management by the courts. Inevitably, this kept control of matters with the courts. Procedural difficulties arose and always had to be resolved by motions and court orders. The system slowed down just as it had before Civil Justice Review. By 2004, the system was in considerable difficulty and in Toronto where the largest number of cases in Ontario occur, the Regional Senior Judge decided the system had broken down. After considerable input, His Honour made the decision to divorce case management from mandatory mediation.

It should be said that during the mandatory mediation programme, while tied to case management, there was a settlement rate of approximately 40% of all cases. It should be also be emphasized that mediations during that time were obliged by rule to occur within 90 days of the first defence delivered. In many cases, of course, that was too early for all practical purposes.

In January 2005, the system was changed to allow mandatory mediations to occur before pre-trial when counsel thought they would be most effective. In the course of the last two years, this change has led to an 80% settlement rate at mediation. While there have been fewer mediations during the last two years than there were in comparable years prior to the change, the results are startling. By putting control of the timing of mediation back in the hands of counsel conducting the cases, and through the use of private mediators, not tied to case management, the success rate of mediations doubled. In the scheme of things, that doubling was almost overnight.

There was another factor which might have had some effect on the change. During the first seven years of the mandatory mediation programme, mediators were assigned from a panel in cases where counsel did not choose the mediator. In the last two years, it is fair to say that most mediations have been conducted by mediators of choice, selected by counsel and not assigned.

In Ontario, much has been learned over the last ten years. In particular, counsels’ selection of mediator and selection of timing for the mediation have had dramatic results by way of doubling the success rate of settlement at private mediations.

But this degree of success apparently, is only the beginning. There is currently a Civil Justice Reform Project underway, being conducted by a former judge of the Ontario Court of Appeal. The mandate of this project is to propose options to make the civil justice system more accessible and affordable to Ontarians. Apparently, despite the success rate of settlement recently enjoyed in the three cities where mandatory mediation exists in Ontario, the system is still most accessible to those with the financial ability to pay legal costs, or to those who have literally no resources and whose expenses are paid through the Legal Aid system. It is often joked that most lawyers couldn’t afford their own fees if they had to pay them.

A study has been made of the Civil Justice Council which operates in England. This body was established as a result of the Access to Justice Report by Lord Woolf in 1996 in England. It is a voluntary body established to oversee and coordinate the implementation of proposals by Lord Woolf. As many will know, this has led to a system of pre-action protocols including mediation before a claim is issued.

Although it is early in the current Ontario project, it is not expected that the British approach will be used.

The task force of the Ontario Bar Association has made certain recommendations to the Civil Justice Reform Project. These include expanding the Ontario Mandatory Mediation Programme throughout the Province from those three cities which are now served, introducing mandatory mediation into Small Claims Court, and introducing mandatory mediation into the Family Law system.

The submission also included reference to pre-action protocols, proportionality (connecting costs of the proceeding to the amount in dispute), expanding Collaborative Law (agreeing not to go to litigation) and the use of a Notice to Mediate as an alternative manner to commence proceedings.

The ADR Professionals Committee also made reference to an article which had been written as a speech by the Associate Chief Justice of the Court of Appeal for Ontario, delivered at the Canadian Forum on Civil Justice Conference in May 2006. In that speech there was a study of lessons that the public civil justice system could learn from the private system. The lessons may be summarized as follows:

The market is demonstrating that Canadians wish to select their dispute resolvers with expertise in the type of matter at issue. While the public system does not necessarily provide judges with expertise in a particular area, in the private system counsel are able to choose a mediator with such expertise.

Timing, in particular the avoidance of delay is crucial. Unlike adjournments that happen frequently in the public system, when a mediation is arranged, the date is fixed and it is the only matter on the mediator’s list. Mediations virtually always proceed when scheduled.

The public system has too few resources for too many cases and long list cases consume a great quantity of court time still. The time and expense of private dispute resolution is far more effective and efficient.

Complexities need reduction and flexibility needs to be increased in the public system. In the private system, the methodology is simpler and faster largely because the rules are simpler.

Multi-jurisdictional disputes can be more simply resolved through a private system than a public civil justice system in the complexities of a growing global economy.

The private system is informal and user-friendly. Unlike formal litigation procedures, the informal system whether mandatory or voluntary, offers an option, an option which, as it turns out, has a proven success rate.

If these lessons learned are considered in the Civil Justice Reform Project, then the road to this point will have been wisely travelled.

Interestingly, the current project seems to be addressing the issues from the perspective of the party involved in the dispute. Among many other considerations, it appears to be looking at the benefits of mediation, including mandatory mediation, the differences between rights-based and interest-based approaches, the costs of the process, the manner in which self-represented litigants are dealt with, the use of mediation in different types of litigation, and the question of added value to the parties in the settlement outcomes by the use of a mediator.

It is certainly appropriate that we all remember that the system of civil justice is here for the use of the parties in the litigation and not just for counsel or the courts.

It would appear that Ontario is on the right track. It is looking at recent history and learning from it. It is looking forward from the perspective of the ultimate user of the system of administration of justice. From where I stand, the future for mediation in Ontario looks even brighter still.

Fifteen or twenty years ago, when one looked at the spectrum of processes available in the nature of alternative dispute resolution, mediation formed only one of several different alternatives. Most of the alternatives related more to the nature of a quasi-judicial proceeding; for example, mini trials, pre-trials, arbitration and neutral evaluation type proceedings. By their nature, those proceedings were typically adversarial and rights-based.

When I wrote articles or gave lectures on alternative dispute resolution in the late 1980’s and early 1990’s, I had to define mediation and explain the process to lawyers who were largely unfamiliar with it. I explained that unlike those adversarial type proceedings, mediation was really a form of negotiation assisted by an individual who would bring both facilitation and process to the negotiation. The parties would not be sworn, but would be expected to tell the truth. The framework of the process would be confidential and therefore, if unsuccessful, could not be discussed at a later time in any court proceeding. The magic of the process was that the parties had an opportunity to speak face to face probably for the first time since their dispute arose. In a controlled but relaxed environment, with a facilitator who understood the issues and was trained in the process, significant settlement rates could be achieved.

Back in those days, mediation was just coming into the legal vocabulary. Many were still making mockery of it as a form of meditation. Others were criticizing it as a wimp mentality as opposed to a warrior mentality involved in litigation proceedings. In many parts of the world in common law jurisdictions and in particular, in civil law jurisdictions, mediation was virtually unknown. The global legal community was familiar with arbitration on both a domestic and an international basis. Arbitration had been created as a creature of statute in the late nineteenth century. There was significant familiarity with the process and parties in legal disputes tended to understand it. How times have changed!

Even ten or fifteen years ago I had to check with the lawyers privately in advance of a mediation to find out if they had ever attended one before and to learn what they had explained to their clients about the process. This was not a step I took lightly because I did not want to insult, but at the same time it was more than apparent that many lawyers had never been to a mediation and really did not understand how it worked. Many were wary of embarking on a process that they were unfamiliar with. In those days, when I lectured on the topic, I told lawyers they could compare the process in some ways with sex. Before anyone tried it, they had heard lots about it, knew that they wanted to try it, but were a little intimidated and embarrassed before their first time. On the other hand, once they had experienced it, they were converts and wanted more of it. Today that might be a politically incorrect way of describing the situation, but it certainly opened eyes and made people listen in those days.

Mediation is now widely used in North America. There are jurisdictions in which mediation is prescribed by statute, by rule of practice, by judicial direction, or by judicial order. Of course, there is voluntary mediation in any type of situation when the parties choose to access the process.

There are both mandatory and voluntary forms of mediation in litigation matters. The experience in my jurisdiction of Ontario, Canada is that mandatory mediations achieve a level of approximately 45% success and voluntary mediations achieve settlement rates with over 80% success. I believe these results are fairly widespread based on anecdotal information for mediators in many jurisdictions.

Moreover, mediation has become an accepted process available to deal with almost any type of dispute. It has particular attraction in cases where parties have a dispute, but really need to continue doing business together. For example, this would be the case in construction projects, supply agreements, corporate workplaces, shareholder and partnership disputes and so on. But even in one-off relationships such as personal injury, sexual harassment, or even estate matters, mediation has proven itself to be the process of choice.

Why has mediation achieved such levels of success in such a relatively short time? There are certain aspects to this process that make it highly attractive. Firstly, it is very quick. Secondly, the parties agree on a mediator and fix a date. Thirdly the matter proceeds on that date on a fairly simplified brief. Mediators do not double book or have long lists as is so common in court matters. As a result of the timing expediency, costs are cut drastically by comparison with other legal proceedings. For example, even by comparison with arbitration, there is firstly, no arbitrator to pay. Secondly, there is no lengthy hearing and calling of evidence, witnesses and other such formalities. Thirdly, mediations can be conducted without lawyers by the parties with the mediator alone, or with counsel or other assistance. For the most part in my experience, mediations involve the principals in the dispute along with their lawyers. Fourthly, while there are both rights-based and interest-based mediations, one of the really novel aspects of mediation is to look at the interests of the parties rather than their legal rights. By cutting through the legal rights formalities and the remedies mentality, the parties are focused on their interests and what really matters is finding a resolution. Fifthly, the parties are the authors of their settlement and as a result, enforcement is virtually never a problem. Compare this with the difficulties which often arise after arbitral awards are made and have to be enforced in a court. This is a particularly serious problem in international arbitration and much law has developed at the judicial level internationally just dealing with issues of enforcement of arbitral awards. Where the parties have a direct hand in reaching the agreement and not having it imposed upon them, they are keen to perform its terms as quickly as possible in order to implement the settlement.

For all of these reasons and many others, the acceptability level of mediation has grown rapidly in North America. It is used widely in various forms throughout Canada and the United States and has a continuing growth throughout Europe, South America and other parts of the world.

Indeed now when we look at alternative forms of dispute resolution, we find a substantially increased list. This list includes terms such as facilitation, conciliation, med-arb, arb-med, deal mediation, collaborative law and circle process.

In my submission, all of these processes are really processes which involve mediation in one fashion or another. Some argue that facilitation and conciliation are really just other terms for mediation, sometimes in the international setting. The concepts of med-arb and arb-med, have developed substantially over the last ten years and when carried out properly, are really separate processes which have in common the fact that one person may be involved as the neutral in both processes.

In deal mediation, there is no existing litigation between the parties and there may or may not be counsel involved. Typically, the parties are connected through some commercial agreement in which there is a dispute, or they may recognize the need to negotiate a new agreement. A typical case would involve 50-50 shareholders in a company who have reached a deadlock on an important issue and need assistance to overcome the problem while they continue to operate the company.

In collaborative law, the parties and their lawyers sign an agreement that they will negotiate in good faith and not undertake legal proceedings in any case. What really exists here is a mediation where the two lawyers are essentially the mediators and their clients are the negotiating parties.

Circle process originated with the aboriginal peoples of North America. In this type of process, typically, an elder was the neutral who led the discussion. Because often more than two persons were involved, the parties actually sat around in a circle. Many mediations also take place around a circular table. The reason for this is to establish equality amongst all participants with no one at the head of the table or in a position of power one over the other. This process has now found its way into criminal sentencing matters and various forms of civil dispute resolution which may involve estate disputes, corporate workplace disputes, or ratepayer municipal disputes.

It is my observation, and my submission that mediation has been one of the most rapidly growing processes known in the evolution of legal history and more particularly, settlement of legal disputes. These numerous variations, in my submission, are evidence of successful spin-offs from the fundamental concept of interest-based mediation.

If it has taken 500 years for our legal rules of law to develop through the judicial systems, it has probably taken only 500 weeks for the legal community to accept and build upon mediation as an interest-based dispute resolution process.

It is said that the law moves slowly, but it has also been recognized in recent times that lawyers are a fast read. Indeed, how swiftly we have moved to accept and promote mediation, both domestically and internationally.

Introduction

Over the course of the last 20 years or so, mediation has become an increasingly important part of civil proceedings. In some jurisdictions such as Ontario, Canada, mediation has even become a mandatory part of the process in major commercial litigation centres. Mandatory mediation applies to many forms of civil proceedings, although there are some exceptions.

The framework for mediation has typically been found either in Rules of Procedure, or in Practice Directions of the court. Voluntary mediations have also been available on an ad hoc basis as arranged between the parties.

The New Legislation

The new kid on the street in Ontario is the Commercial Mediation Act, 2010, the stated purpose of which is “to facilitate the use of mediation to resolve commercial disputes”.

Key Definitions

“Mediation” is defined in Section 3 of the Act as meaning, “a collaborative process in which,

the parties to a commercial dispute agree to request a neutral person, referred to as a mediator, to assist them in their attempt to reach a settlement in their dispute, and

the mediator does not have authority to impose a solution to the dispute on the parties (“mediation”) 2010, c.16, Sched. 3, s. 3”.

“Commercial Dispute” is also defined, as meaning, “a dispute between parties relating to matters of a commercial nature, whether contractual or not, such as trade transactions for the supply or exchange of goods or services, distribution agreements, commercial representation or agency, factoring, leasing, construction of works, consulting, engineering, licensing, investment, financing, banking, insurance, exploitation agreements and concession, joint ventures, other forms of industrial or business co-operation or the carriage of goods or passengers”.

One can see from this definition that the Act is intended to pertain to a very wide range of commercial dealings conducted in everyday business.

The Act is based on the UNCITRAL Model Law on International Commercial Conciliation (2002) and provides that, “consideration must be given to its international origin, the need to promote uniformity in its application and the observance of good faith”. s.4(1)

The Process

The Act makes provision for the formal commencement and termination triggering events and also provides for the appointment of the mediator to be made by agreement of the parties. (s.5 and s.6)

The proposed mediator is obliged to investigate potential or current conflicts or any circumstances that may give rise to a reasonable apprehension of bias, and to disclose same without delay to the parties if such conflict or circumstances exist. That duty to disclose continues until termination of the mediation.

Section 6 also deems certain interests in relationships to be a conflict of interest. This provision avoids the guess work by a proposed mediator in relation to personal interests, financial interests, and existing or previous relationships with a party or person related to the party to the mediation.

As to the mediation process itself, the parties and the mediator may agree on the process or may agree to follow a set of existing rules or procedures unless otherwise prohibited from doing so. In the absence of such an agreement, the mediator may conduct the mediation following the process he or she considers appropriate by taking into account requests of the parties and circumstances of the dispute. (s.7)

There are provisions for a multi-party and separate caucuses and for proposals for settlement at any stage of the mediation; there are also requirements for fairness, disclosure and confidentiality.

Disclosure and Confidentiality

Section 8 deals with disclosure and confidentiality with some particularity. Essentially, there is a duty of confidentiality on the parties, the mediator and any other persons involved in the conduct of the mediation. The exception occurs when the parties and in certain cases the mediator agree to disclosure, or if the disclosure is required by law, or for the purposes of enforcing settlement, or for a mediator to respond to a claim of misconduct, or if the disclosure is required to protect the health or safety of any person. There are also exceptions for publicly available information and otherwise non-confidential information. (s.8)

Inadmissibility

Section 9 deals with information which is not discoverable or admissible in evidence in arbitral, judicial or administrative proceedings. Those forms of information not so discoverable or admissible, are as follows:

An invitation by a party to mediate a commercial dispute, a party’s willingness or refusal to mediate the dispute, information exchanged between the parties before the mediation commences and any agreement to mediate the dispute.

A document prepared solely for the purposes of the mediation.

Views expressed or suggestions made by a party during the mediation concerning a possible settlement of the dispute.

Statements or admissions made by a party during the mediation.

Statements or proposals for settlement made by the mediator.

The fact that a party indicated a willingness to accept a proposal for settlement made by the mediator.

The fact that a party or the mediator terminated the mediation.

However, the exceptions permitting the information above to be admitted in evidence are to the extent the information is required:

by law;

for the purposes of carrying out or enforcing a settlement agreement;

by a mediator to respond to a claim for misconduct; or

if all of the parties to the mediation consent and, if the information relates to the mediator, the mediator consents. s.9(2)

Med-Arb

The Act seems to anticipate that there be no med-arb unless all parties to the mediation otherwise agree. In the absence of such an agreement “a mediator shall not act as both a mediator and an arbitrator or as an arbitrator after acting as the mediator with respect to,

the commercial dispute that is the subject of the mediation; or

another dispute that arises from the same contract or legal relationship or from a related contract or legal relationship between the parties”. s.10

In some jurisdictions this approach might be considered unusual, but in Ontario, med-arb has really only had a strong following in Labour Law, and some very limited following in Family Law.

Settlement Agreements are Binding and Enforceable

Settlement Agreements or Minutes of Settlement are binding on the parties to the mediation who sign them. So long as the Settlement Agreement disposes of one or more issues in dispute in the mediation, the Agreement is enforceable by one party against another party who fails to comply with its terms. The party wishing to enforce, shall give notice to all parties who signed the Agreement and may then apply to a judge of the Superior Court for a judgment or an order. The Rules of Civil Procedure in Ontario apply on such an application. The judge may grant judgment in accordance with the Settlement Agreement, or the Registrar of the court may make an order authorizing the registration of the Settlement Agreement with the court..

No judgment or order shall be granted to a party who did not sign the Settlement Agreement or consent to its terms, or in the case of a Settlement Agreement obtained by fraud or one which does not accurately reflect the terms agreed to by the parties.

A registered order has the same force and effect as a judgment. Costs related to the registration of the Settlement Agreement are recoverable as if they were sums payable under a judgment. s.12 and s.13

Enforcement of Mediator’s Fees

If the mediator is not paid his or her fees and expenses in accordance with the Settlement Agreement, s.13 provides for enforcement by way of judgment or order similar to the enforcement of the Settlement Agreement. This provision applies so long as the Settlement Agreement is signed by one or more parties to a mediation of a commercial dispute and contains an undertaking by one or more parties to pay the fees and expenses of the mediator for the mediator’s functions, and sets out the amount of fees and expenses payable or the manner of calculating the fees and expenses, all the rates and other variables of which have been agreed to in the agreement, minutes or other document. s.14

Conclusion

Most of the provisions that have been codified in this legislation were already matters of fact in practice. However, details such as enforcement of the Settlement Agreement were always pursuant to the common law and/or Rules of Procedure rather than being authorized by legislation. The legislation provides a ready reference for most everyday factors that affect commercial mediations and is a first effort at legislation in Ontario for this important and increasingly busy area of practice.

INTRODUCTION The personal insolvency law arena in Canada saw many important developments in 2011. This paper will discuss five significant 2011 decisions which will influence both the direction and the development of personal bankruptcy law. From these, four issues have emerged. First, Canadian courts are relaxing the stringent provisions and allowing creditors to immediately proceed to enforce their rights by lifting the automatic stay of proceedings imposed by the Bankruptcy and Insolvency Act. Second, a re-affirmation of the narrow the use of the equitable jurisdiction of the Court. Third, that the Court will look beyond the descriptive terminology used by the parties to determine the true essence of the asset, and lastly, that there needs to be policy reform in order to ensure that bankruptcy legislation is not tactically used to exclude spouses from what would otherwise be their rightful entitlement.

RE BERENBAUMRe Berenbaum was an application by a Bankrupt for his discharge pursuant to the provisions of the BIA, which application was rejected principally on the basis that the sole purpose of the bankruptcy was an avoidance of a tax liability to CRA. Registrar Nettie began his endorsement by quoting Franklin D. Roosevelt, “Taxes, after all, are dues that we pay for the privileges of membership in an organized society.”

Background The Bankrupt was a 59-year-old bookkeeper, who was formerly a chartered accountant and a licenced trustee in bankruptcy. He lived with his second wife in a rented two-bedroom apartment in an upscale and desirable area of Toronto. The Bankrupt’s standard of living greatly exceeded the Superintendent’s Standards for a family unit of two.

While a C.A. and a bankruptcy trustee, he was a partner in a large national firm, from which he ultimately stole $1.1 million, some of which came from insolvency estates that were under his control. He was charged with this crime and later convicted. It was these criminal charges that led to his first bankruptcy which, not surprisingly, in addition to his various creditors, included extensive legal fees to his criminal lawyer and income taxes assessed by CRA owing on the undeclared stolen money. The Bankrupt testified in Court that he should no longer have had to pay the assessed taxes, as part of his sentence was to repay all of the stolen income. He however, took no steps to expunge CRA’s proof of claim in the first bankruptcy and elected to let the proof of claim stand, unchallenged. The Bankrupt received an automatic discharge, and as a result, he stood released of some $990,000.00 in income tax liabilities and $14,000.00 in GST obligations. In short, he avoided paying Her Majesty over $1 million in taxes.

Once discharged, the Bankrupt was hired as a consultant, earning both a base salary and a draw from profits earned. The Bankrupt invoiced his base salary each year to the firm, through his own sole proprietorship, and declared and paid taxes each year on this income. He also invoiced and was paid GST on this consulting income, however, did not remit any to Her Majesty. Additionally, the Bankrupt did not declare any of his bonus draws of approximately $100,000.00 per year to Her Majesty for ten years.

As Registrar Nettie stated, “one can only presume that he would be continuing to live this way even today,” except that the firm decided to shut down and had to account to the CRA for all of the unearned draws. This resulted in the Bankrupt being called upon to account for the undeclared income. Instead of approaching CRA and re-filing correct tax returns, he declared bankruptcy for the second time, assuming that “he was safe in what he knew would be the protection of the BIA (do not forget that he is a former trustee himself)”. It was only then that he filed “a tax return in which he declared, improperly, all of the draws for 10 years in one tax year”. This resulted in a proof of claim by CRA in his second bankruptcy of approximately $1.1 million.

Decision Registrar Nettie stated that the duty of a discharge court is “…to balance the expectation of the honest but unfortunate debtor for a discharge, relieved of the burden of her debts, with the right of the creditors to be repaid, and the need to maintain public confidence in the integrity of the insolvency system”. The Bankrupt was neither honest nor unfortunate. Despite the fresh start granted by the first bankruptcy, the Bankrupt continued to live beyond his means, flouted tax obligations known to him as a chartered accountant, and sought the protection of the BIA only when caught.

Registrar Nettie went on to say in regards to the issue of creditors and expectations that “it is by now trite law that taxes have a special status not only as to their use, and the fairness of all paying their share, but due to the fact that taxing authorities are involuntary creditors. CRA does not get to assess creditworthiness and refuse to extend credit. CRA must rely on the honesty of each citizen to report income, and apply the tax law fairly and reasonably…The Bankrupt has unilaterally deprived Her Majesty of this.”

“The Bankrupt needs to learn once and for all that he must pay his taxes”. In quoting Registrar Funduk from Re Ginther, 2003 ABQB 352, “Rehabilitation is not the driving factor here. Deterrence is, not just for the bankrupt but more important for others who might be tempted to evade income tax liability by conveniently using bankruptcy as a financial planning tool”. By his own motion the Registrar lifted the stay under s.69.4 of the BIA to allow CRA to immediately proceed to enforce its rights before the discharge of the Trustee.

Implications and Practical Consequences In his decision to lift the stay and allow the CRA to immediately proceed to enforce its rights, Registrar Nettie circumvented the BIA to allow for a creditor to accelerate the process of enforcing recovery from a bankrupt.

Under normal circumstances, where the discharge of the Bankrupt is not granted, CRA would have had to await the discharge of the Trustee before proceeding. In this case, the Registrar accelerated the process by bringing his own motion. This was a very aggressive approach to protection of the integrity of the bankruptcy process. One wonders whether this decision might be used in future to grant creditors similar relief in the face of egregious conduct.

RE JAMESRe James was a motion brought by the trustee for authorization under s.30(4) of the BIA in respect of its proposed sale of the Bankrupt’s interest in real property (the “Property”), and a cross-motion by the Respondent, the wife of the Bankrupt under s.37 of the BIA, wherein exception was taken with the decision of the Trustee not to allow as a deduction from the value of the Bankrupt’s interest in the Property certain amounts which would reduce the value of that interest for the purposes of arriving at a sale price. The Respondent appealed the decision of the Trustee not to allow a reduction in the value of the Bankrupt’s interest which she had agreed to purchase. She claimed the value should be reduced: (1) in an amount equal to payments made solely against the first mortgage; and (2) in the entire amount of the second mortgage by the application of the doctrine of equitable exoneration because she had entered into the second mortgage under duress.

Background Two mortgages were taken out by the Bankrupt and the Respondent on the Property. The Respondent was the sole breadwinner in the family during the relevant time period, and therefore was the source of all of the first mortgage payments that were being made. The payments were made on account of her joint and several obligations under the first mortgage.

The Respondent and the Bankrupt executed an application for a second line of credit against the Property. The line of credit was approved and the entire amount of the proceeds thereof were transferred to the Bankrupt’s corporation essentially for its sole use.

The Respondent deposed that she signed the documents necessary to apply for the line of credit and to secure it against the interests of her and the Bankrupt in the Property under duress. She swore that she did not want to sign the documents and was not given an opportunity to seek legal advice. The Respondent swears that despite her reservations, “she signed because she was ‘afraid that if [she] refused, [the Bankrupt] would blame [her] for the loss of his business and this could result in the break up of our marriage’”.

Decision In regards to the first mortgage, Registrar Nettie stated that “As a matter of trite law, her satisfaction of those obligations, absent some contrary agreement between the mortgagors, of which there was no evidence, entitles her to claim from the co-mortgagor his share of the payments, as made by her.” The Respondent knew that her husband was not doing well in his business and that she was the sole income earner for the family. She could have taken steps to obtain security or a title transfer to protect her in making the Bankrupt’s share of the payments on the Property. “To allow her to revise history and use equity to come back after insolvency and obtain such security is…contrary to the spirit and intent of the BIA”. The legal claim of debt by the Respondent against the Bankrupt cannot be converted into an equitable claim against title, and the mortgage payments cannot attach to the Bankrupt’s title, in law or in equity, so as to bind the Trustee and other creditors.

In turning to the second mortgage, Registrar Nettie stated that the doctrine of equitable exoneration exists for equity to presume evidence of an interest, “the failure of which would result in a harsh legal outcome, where the failure to evidence the interest is the result of some legal or societal, and in any event demonstrated, disability.” The Registrar found no evidence that the Respondent’s failure to evidence an interest in the Bankrupt’s share of the property securing her portion of the line of credit, was due to some legal or societal disability. The Respondent claimed that she had signed documents necessary to apply for a line of credit, secured by the Property, under duress and without the benefit of legal advice, to which the Registrar stated that “the Respondent now wants, in effect a ‘do over’ on this choice”.

The Respondent could have insisted that the Bankrupt charge his share of the property on a first dollar basis. Moreover, several years passed after the line of credit was obtained and the money therein was loaned to the Bankrupt’s corporation, during which time the Respondent could have obtained security from the Bankrupt.

The Registrar found that in choosing to sign for the line of credit to avoid the displeasure of the Bankrupt and a possible breakdown of their marriage, the Respondent demonstrated herself to be competent and a rational economic actor. The Respondent did not prove any disability, societal or legal, to have existed such as to have prevented her from protecting herself from the Bankrupt. She had also failed to convince the Court that such protection of her interest in the Property was ever even their intent.

“Competent adults are to be held to the consequences of their decisions, and it is inappropriate for this or any other Court to enable an avoidance of this based on any notions of presumptive gender inequality or that either gender is somehow necessarily unable to make hard choices, or ought to be relieved from the consequences of those hard choices because of their gender.” “Specifically, married women are no longer chattels of their husbands, and no longer disabled statutorily or otherwise from dealings with their property. They ought and must be accorded the respect of the fully independent and competent adults that they are to make decisions and to both have those decisions be protected by Courts as well as to be held to those decisions by those same Courts.”

It is not in the interest of other creditors to allow the Respondent and the Bankrupt to use equity to wrestle away an amount from innocent creditors. The Court found that the equity of exoneration is not engaged and declined to exercise his jurisdiction to charge the Trustee’s share of the Property with payment. Accordingly, the Respondent’s cross-motion was dismissed.

Implications and Practical Consequences The decision in this case re-affirmed the narrow use of the equitable jurisdiction of the Court. Business decisions made by Trustees acting in good faith and in a commercially reasonable manner will not easily be reversed. The decisions of competent adults will not be overturned based only on the fact that they were put in unfortunate situations that called for tough decisions to be made.

RE SNOWRe Snow is an appeal from the Registrar’s decision holding that the Bankrupt’s Income Replacement Benefits (IRBs) from a motor vehicle accident are property vesting in the Trustee.

Background The Bankrupt was involved in a motor vehicle accident in October 2003. In May 2004, the Bankrupt filed an assignment in bankruptcy, claiming that the cause of the bankruptcy was the motor vehicle accident.

In February 2005, the Bankrupt received an automatic discharge, and in October 2005, the bankrupt, through counsel, commenced an action in the Superior Court of Justice claiming damages as a result of the motor vehicle accident. In the motor vehicle accident action claimed general damages in the amount of $1,000,000.00, special damages in the amount of $500,000.00 and Family Law Act, R.S.O. 1990, c. F3, damages in the amount of $100,000.00. In addition to the damages claimed in the motor vehicle accident action, the Bankrupt also had recourse to certain statutory accident benefits under Ontario’s Standard Automobile Policy, in accordance with the limited no-fault regime in place for motor vehicle accident benefits. Those accident benefits included a claim to income replacement benefits (“IRB”), on a no-fault basis, from the Bankrupt’s own automobile insurer, as opposed to the tort defendants and their insurer in the motor vehicle accident action. The Bankrupt also claimed and received Canada Pension Plan disability amounts, and certain Employment insurance payments as a result of the accident. Although the Bankrupt claimed funds from numerous sources, the nature and interest of the Trustee was only in the IRB entitlement. The IRB entitlement was paid out to the Bankrupt, and the Bankrupt and his insurer agreed to settle the statutory accident benefits obligations remaining, including payment of all IRB to be paid until age 65 for a lump sum of $69,000.00. Of this amount, $45,400.00 was on account of all past and future IRB claims.

While the settlement of the statutory accident benefits claim, including the IRB, occurred after discharge of the Bankrupt, the very right to make the claims which were then crystallized prior to the Bankrupt’s discharge, and, in fact, prior even to the assignment itself.

At the Motion before Registrar Nettie, the Trustee claimed the entire amount as having vested in it as property of the Bankrupt under s.67 of the BIA, since the cause of action arose prior to the date of the assignment. The Trustee also argues that the IRB is on account of the lost future ability of the Bankrupt to earn income, and that that loss is a capital asset, the compensation for which vests in the Trustee.

The Bankrupt claimed that the IRB was income pursuant to s.68 of the BIA, and as such is not available to the Trustee for distribution to the creditors except in accordance with that section. The Bankrupt argued that the capitalization of that income stream does not change or affect its characterization as income, and does not, therefore, make it an asset under s.67 of the BIA rather than income pursuant to s.68 of the BIA.

Registrar Nettie found that the IRB was considered property under s.67 BIA, in that the Bankrupt had, at the time of the assignment, a right to claim and receive it, and chose to capitalize the future stream of money inflow, which it represented. That property right vested in the Trustee at assignment. The Trustee was therefore entitled to receipt of the $45,400.00 on account of past and future claims under the IRB, and if the Bankrupt received this amount from the insurer, he was ordered to forthwith remit it to the Trustee.

On appeal, the Bankrupt took the position that the Registrar erred in characterizing the IRB payment as capital as opposed to income. The Registrar should have concluded that the tort action settlement was for pain and suffering only and thus not part of the Bankrupt’s estate vesting in the Trustee. “As a result, he says the Registrar should have declared the Trustee has no interest in the settlement funds…”

The Trustee took the position that the Registrar was correct in both his determination that the IRBs vested in the Trustee.

Decision The Honourable Madam Justice Mesbur held that the Registrar erred in characterizing the IRB payment as a capital asset. Her Honour stated that “in essence the registrar looked at the source of the funds, rather than at the nature of what they replace…The essential nature of the payment, not its source, should determine whether it is income or not”, and concluded that the Registrar was wrong when he determined that the IRBs were not income.

The Honourable Madam Justice Mesbur allowed the appeal in part, and set aside the Registrar’s finding that the IRB payment is property of the Bankrupt, vesting in the trustee. “The IRB payment is in the nature of income, and is subject to the excess income provisions of the Bankruptcy and Insolvency Act.”

Implications and Practical Consequences Based on the foregoing, it is apparent that the Courts are reluctant to provide creditors with a “windfall” when a bankrupt is the victim of personal injury. The capitalization of future income does not change its character. Moreover, the Courts have stated that the substance of the payment must be the governing factor and not the fact that it takes on a different form than that which was intended.

The proper course of action for Trustees in such circumstances is likely to simply oppose the bankrupt’s discharge rather than seeking to recover proceeds of such settlements.

RE CONFORTIRe Conforti was for a motion brought by the Trustee in Bankruptcy of Mr. Conforti seeking directions as the entitlement of certain proceeds of settlement of litigation in the amount of $275,000.00. The issue was whether a receipt of settlement funds in respect of a motor vehicle accident on account of “loss of competitive advantage” is considered property of the bankrupt to be dealt with under section 67 of the BIA or is considered income to be dealt with under section 68 of the BIA.

Background The Bankrupt filed an assignment in bankruptcy in September 2009. Prior to the Assignment, in December 2007, the Bankrupt commenced a legal action in respect of a motor vehicle accident that occurred in January 2007. The action was settled for $275,000.00, and counsel for the parties to the litigation agreed that, of this amount, $100,000.00 was allocated in respect of “future loss of competitive advantage”. It was also expressly agreed that no amount was to be paid on account of past loss of income.

The Bankrupt did not advise the Trustee of the litigation at the time of the assignment, and it only came to light when his lawyer in the litigation advised the Trustee of the settlement.

The Trustee took the position that the award from the settlement funds represented compensation for the loss of a capital asset. As such, the Trustee said that the Bankrupt’s claim constituted property of the bankrupt for purposes of s.67 of the BIA.

The Bankrupt took the position that the award from the settlement funds represented “total income” for the purposes of s.68(2)(a) of the BIA, which would therefore be dealt with under s.68 of the BIA and not vest in the Trustee as a capital asset.

Decision The Honourable Mr. Justice Wilton-Siegel broke down his decision into separate parts: (1) whether a particular receipt falls within the definition of “total income” in s.68(2)(a) of the BIA; and (2) whether the award constitutes “total income” for such purposes.

The Court stated that a purposive approach to interpretation of “total income” in s.68(2)(a) was needed, as this is what had been indicated by the Supreme Court of Canada in Wallace v.United Grain Growers Ltd., where it held that a payment on account of a wrongful termination was income for the purposes of s. 68(1). In reaching that decision, The Honourable Mr. Justice Iacobucci stated that an award that is akin to income does not lose that characterization because the award takes the form of a lump sum award. Accordingly, The Honourable Mr. Justice Wilton-Siegel concluded that the court should look to the essential nature of the award to determine whether it is income or not despite the characterization of the award provided by the parties in the minutes of settlement.

In applying the purposive approach described above, Justice Wilton-Siegel concluded that the award was income for the purposes of s.68 of BIA. In this case, while the minutes of settlement referred to a “future loss of competitive advantage”, he stated that it was “abundantly clear that this payment is on account of the loss of future income. As a result of his injuries, Conforti is unable to continue to earn income at his previous level. His probable future income has been permanently reduced.” The Court went on to state that because it is unreasonable to assume that no compensation is being paid for the loss of future income in the present circumstances, he concluded that the essential nature of the award is compensation for lost future income. The fact that the award is a capital sum did not change the character of the payment, which is to replace or compensate for lost income. Similarly, the fact that the Bankrupt continues to earn some income was not inconsistent with the award being, essentially, replacement income for the difference between what he could have earned and what he is earning presently and likely to earn in the future.

Based on the foregoing, the Court concluded that the Award is “akin to income”. “It replaces the income in the future that Conforti will never make.” It therefore falls within the definition of “total income” in s.68(2)(a) and is subject to the regime in s. 68 of the BIA.

The Trustee went on to make two distinct arguments. The first argument is that a payment for loss of competitive advantage should be treated as a payment for a loss of future income and, following Andrewsv.Grand & Toy Alberta Ltd., should therefore be treated as an award for a loss of a capital asset.

The Honourable Mr. Justice Wilton-Sigel agreed that the award constitutes compensation for future income loss despite being labelled an award in respect of a future loss of competitive advantage. However, he did not accept the argument that Andrews should govern the treatment of the Award for the purposes of the BIA for the reasons set out above.

The second argument of the Trustee was that regardless of whether or not the treatment of an award for loss of future income is governed by Andrews, the nature of an award for loss of competitive advantage is understood to be an award for the loss of a capital asset and, therefore, should be treated as property of the bankrupt.

The Honourable Mr. Justice Wilton-Siegel surmised that “the important point to be taken from these cases is that the loss of competitive advantage relates to a contingency that is additional to the customarily recognized contingencies that might affect an injured party’s future earnings, such as those set out by Dickson J. in Andrews,at p. 232: unemployment, illness, accidents and business depression, to which should be added mortality”. The concept is directed toward the contingent loss of an individual’s future marketability ─ it may never occur but, if it does, it will do so in a manner that results in diminished income in the future. This raised the question of the relationship of the two concepts: loss of future earnings and loss of competitive advantage. Based on a logical deduction from the Court’s analysis, it can be argued that the concept of loss of competitive advantage is distinct from the concept of foregone future income that is probable as of the date of the calculation.

Based on the foregoing, the Honourable Mr. Justice Wilton-Siegel concluded that the award was to be treated as “income” for purposes of s.68 of the BIA and therefore does not vest in the Trustee.

Implications and Practical Consequences The case is significant in that it shows that the Court will look beyond the descriptive terminology used by the parties to determine the true essence of the asset. Trustees must be diligent in the enquiries made of Bankrupts relative to claims for damages to which they are parties. It is not sufficient merely to differentiate only between income replacement and personal damages (which has been the simplistic standard for several decades); rather it is imperative that Trustees enquire into and look to the true nature of each head of damage on which a potential claim might be based so that the stakeholders in the bankruptcy recover all that is ultimately due to them.

SCHREYER V. SCHREYERSchreyer v. Schreyer is a Supreme Court of Canada decision, which dealt with the issue of whether an equalization payment due to a spouse survived the bankruptcy of the owing spouse. More specifically, the case centred on whether a wife could make an equalization claim against an exempt asset where the bankruptcy occurred post-separation. The case specifically involved a Manitoba homestead exemption but the Court’s reasoning could just as easily be applied to exempt assets in other provinces. Examples of this in Ontario might be pensions and RRSPs.

Background Mr. and Mrs. Schreyer separated in 1999 and filed for divorce in 2000, after nineteen-year cohabitation. At the time of separation, their farm was their sole asset of significance. Under their divorce agreement, the husband was to continue to live on the family farm, which was registered on title in the husband’s name, and their assets were to be valued. Once the valuation was completed, the husband was to make an equalization payment to the wife, equal to the value of the farm. Based upon the valuation, it was determined the husband owed the wife an equalization payment of $41,063.48.

Approximately 4 years later, just before the divorce trial, the husband informed both his wife as well as the lawyers that he had filed for bankruptcy and subsequently been discharged before the valuation was complete. As the valuation determined that the husband owed the wife an equalization payment, the wife would therefore be considered a creditor of the husband’s estate in bankruptcy.

Under Manitoba’s Judgments Act, the family farm was exempt from execution by way of seizure and sale, and while the husband was allowed to keep the farm, the wife’s claims against him for equalization were extinguished by his bankruptcy. When the husband was discharged from bankruptcy he was cleared from his debts and thus could keep the farm. The wife, however, was out of luck, as her entitlement to an equalization payment did not survive the bankruptcy.

Decision The SCC agreed with the Manitoba Court of Appeal and dismissed the appeal on the grounds that her equalization claim was released by the husband’s post-separation bankruptcy. Manitoba was said to be an “equalization jurisdiction”, and not a “division of property jurisdiction” (Ontario is also an “equalization jurisdiction”), and as the wife did not have any proprietary right in the husband’s property, she would therefore only be considered a creditor.

The entitlement to an equalization payment is not an entitlement with respect the actual property of a spouse, and thus, the Court stated that the right of equalization is at most a debt claim. The Court stated that it should not interfere with the Manitoba legislature’s policy choice not to give a former spouse a proprietary interest in family property. The Court acknowledged that this result was unfair: “…the appellant’s equalization claim was based primarily on the value of an asset – the farm property – which was exempt from bankruptcy and therefore not accessible to other creditors. None of the policies underlying the BIA require the appellant emerge from the marriage with no substantial assets. However, despite the unfairness, it was for Parliament to solve the problem, and not the Court itself.

Although the appeal was dismissed, the Court did not award costs to the husband, “in light of the particular circumstances of this case”. The Court appeared to lament the fact that “In its current form, therefore, the [Bankruptcy and Insolvency Act] offers limited remedies to spouses in the appellant’s position”, and stated that “It seems to me that this matter is ripe for legislative attention so as to ensure that the principles of bankruptcy law and family law are compatible rather than being at cross-purposes”.

Implications and Practical Consequences In recognizing the gross unfairness of this outcome for the wife, the Honourable Mr. Justice Lebel noted that law reform on this issue has long been recommended and is urgently required. Instead of permitting bankruptcy legislation to override the intent and effect of provincial family property equalization laws, there ought to be permitted exceptions to ensure that bankruptcy legislation is not tactically used to exclude spouses from what would otherwise be their rightful entitlement. The potential for misuse of this manoeuvre is obvious and while it is within the letter of the law one questions whether it is within its spirit.

CONCLUSION Based on the foregoing, 2011 has been a year with numerous significant developments that may very well alter the direction and development of personal bankruptcy law. The decisions cited have arguably begun to pave the way for considerable transformations in the way in which the Courts view legal principals and issues that have previously been more strictly interpreted.

This article is for information purposes only and should not be considered as legal advice. It is strongly recommended that any prospective entrepreneur consult a lawyer in order to make informed decisions that could involve legal matters.

This article provides a basic framework that is intended to provide an overview of some of the issues that you may need to deal with before starting a business in Ontario. We will introduce the different organizational frameworks that can be chosen, various tax implications, licensing requirements, and employment related matters. This is only a basic overview and your business will have specific issues that we can assist you with.

Brief Summary of Ontario

As one of Canada’s most prosperous provinces, Ontario is home to a diverse economic landscape that is capable of nurturing the growth of a variety of businesses of all types and sizes.

Ontario supports a significant number of branded (franchised) and non-branded businesses. The “Golden Horseshoe” in Ontario is a large industrialized region surrounding the west and north ends of Lake Ontario. It makes up over 50% of the population of Ontario and 20% of Canada as a whole. At the centre of this industrialized region is Toronto. Toronto is the largest city in Canada, both in size and area, and is recognized as the financial capital of Canada. According to Forbes, Toronto is the tenth most economically powerful city in the world and ranks among the top 26 cities in Price Waterhouse Cooper’s list of global “Cities of Opportunities.” Many cities in Ontario offer different advantages depending the needs of your business and your particular goals.

Organizational Structures

Sole Proprietorship

A sole proprietorship is the simplest form of business structure that is typically used by people that are new to small business. There are limited, if any, fees involved in setting up this form of business structure. Essentially, everything is attributed to the owner’s personal income statement, including both profits and losses.

However, with the increased rewards and benefits of ownership; there is also additional risk. The sole proprietor takes on full responsibility, personally, for the debts, obligations and liabilities of the company. If you get sued for a “business issue” then the plaintiff can look to your personal assets; such as your home, to satisfy any judgment.

Most sole proprietorships are registered as a business name under the Ontario Ministry of Government Services. Despite having a more formal name, all debts/ obligations can be easily traced back to you.

Partnership

In a partnership, the risks and obligations are split amongst the partners. The partnership is established with a common objective. A partnership is, therefore, more than one individual acting together as a single entity.

Many partnerships are registered with the Ministry of Government Services. It functions similar to a sole proprietorship however each partner (a partner can be an individual or corporation) takes on the full share of the legal obligations and liabilities of the partnership. This is a potential big risk that you need to consider before structuring the partnership.

There are at least three points to consider before establishing a partnership. Firstly, what will be each partner’s responsibility and role in the partnership? Secondly, what happens in the event of a disagreement or dissolution? Thirdly, to what extent can you protect yourself against being liable for the partnership’s obligations? A carefully thought out partnership agreement will contain the answers to these three questions and protect you in the event of dissolution.

Though outside the scope of this article, it is also important to decide on whether you want to form a general or limited partnership.

In a general partnership, each partner is obligated for the full extent of the partnership’s debts and obligations. A limited partnership is a more complex structure than a general partnership and is composed of one or more general partners and one or more limited partners. Limited partnerships are governed by the Limited Partnership ActR.S.O 1990 which sets out the rights, restrictions and obligations of the members of the partnership. A general partner has most of the rights of control and bears most of the obligations (as in a general partnership); whereas a limited partners’ role, obligations and liabilities are drastically decreased. Limited partners have limited right to control the company but have limited liability for its debts. A limited partner’s liability is determined by his monetary contribution to the company.

As a result of the complex nature of a partnership it is important to carefully draft your partnership agreement to ensure that each partner’s obligations are carefully defined and there are arrangements in place in case of a disagreement or dissolution of the partnership.

Corporation

A corporation acts as if it is its own legal entity (think of it as a non-human individual) and its governance can be more complex than a sole proprietorship. A corporation can buy, sell and own property and will pay income taxes on any profits. There are many advantages to incorporating your company: shareholder liability is limited; it is a continuous entity where ownership can be transferred; and there are many additional ways to raise capital that you cannot utilize in the other forms of organizational structure.

Cooperatives or Joint Ventures

Cooperatives are not governed by provincial or federal statute. Rather, the cooperative is governed by the contract formed between the respective parties. Cooperatives are primarily used for specific business ventures with one or more parties involved (where the parties can be anything from an individual to a corporation). The agreement includes provisions related to: the operation and management, division of labour, record keeping, both parties’ financial obligations and the specific rewards involved.

Joint ventures are generally considered to be an association of two more persons based on contract who combine their money, property, knowledge, skills, experience, time and other resources in the furtherance of a particular project or undertaking, usually agreeing to share the profits and the losses and each having some degree of control over the venture.

Taxation

Income Taxes

The different forms of business structure lead to different methods and rates of taxation. Sole proprietorships have the simplest tax structure. Sole proprietorships, for tax and liability purposes, are essentially an extension of oneself operating a business. Therefore, the profits and losses of the proprietorship are added to the owner’s income and taxed through his or her personal income tax. There is no reason for the proprietorship to file a second tax return and incur the additional costs or time.

Paying taxes for a partnership is slightly more complicated then a sole proprietorship, however the partnership still does not require a separate income tax filing. Each partner shows their portion of the profits and losses on their personal, corporate or trust income tax return despite whether they received the money in cash or credit. Although a partnership allows for plenty of flexibility as compared with a corporation; if there are six or more members, or one partner is involved in another partnership, the partnership must also file a separate partnership information return.

Overall, corporations have a much more demanding tax structure than sole proprietorships or partnerships. A corporation operates as a separate legal entity from its owners and has many of the powers and abilities that an individual has. As a distinct legal entity from its owners, Corporations are required to file separate income taxes yearly.

Overall, corporations require a much greater expenditure on taxes than either of the other organizational structures. Corporations require greater accounting records and the forms needed to file taxes are much more complex. Additionally, if you are solely invested in a corporation the corporation will be required to pay corporate taxes and then you will be required to pay income tax on your withdrawals, the other structures do not require taxes to be paid twice on the same earnings.

Municipal Property Tax

Property owners are subject to a municipal property tax. The rates change from jurisdiction to jurisdiction although it is also dependant on the expected use of the property (for instance if it commercial or residential there will be a different rate). This tax rate is applied to the assessed value of the property as determined by the Municipal Property Assessment Corporation.

Health Tax

Employers with permanent establishments in Ontario are required to pay a percentage of wages paid to the government for a health insurance plan. Depending on the total remuneration paid to employees the employer will pay from 0.98% to 1.95% of its total annual wages towards the health insurance plan. Certain employees are exempt from this tax for their first four hundred thousand dollars of wages.

Sales Tax

On July 1st 2010 Ontario imposed a new sales tax regime. The new system merged the Provincial Sales Tax (PST) and the Goods and Services Tax (GST) and lowered the tax rate to create Harmonized Sales Tax (HST). HST is a federally administered 13% tax that is passed down to the end consumer on the finished product. Certain goods are exempt from taxation or given a tax rate of 0%. Certain items are given a point of sale rebate on a portion of the tax as well.

HST is meant to be a tax on the finished product and therefore only the final purchaser should be paying it.

Labour Relations and Employee Matters

Employees working in Ontario are given benefits under the provincial or federal employment standards legislation. Some industries are federally regulated and subject to the Canada Labour Code R.S.C 1985. Examples of federally regulated industries would be telecommunications, railways and banking.

For the most part, employee relations in Ontario are subject to the Employment Standards Act S.O. 2000 (the “ESA”), with specific exceptions provided for certain fields of work. The ESA sets out the minimums that an employee must offer to his employees. The ESA prescribes a minimum wage that must be given to employees ($10.25 an hour in 2011), the minimum notice of termination, payment in lieu of notice, mandatory holidays, vacation entitlement and other minimums.

Additionally, there are limits prescribed regarding the number of hours an employee can work per day (8 hours) or week (48 hours) without an express agreement. Any employee working over 44 hours a week or on holidays must receive overtime pay (which must be 1.5x regular wages).

The terms of the ESA cannot be contracted out of, nor can employees waive their rights towards those minimums. However, if the employer makes alternate arrangements with his employee with more favourable terms than the ESA, the ESA will not to apply. These arrangements can be made with an individual employee or with a group in a collective bargaining agreement.

For the purpose of the ESA, an employer who purchases all or part of another business and then goes on to hire employees from the past business will be continuous employment for the purposes of the act. A subsequent employer usually must recognize the length of employment with the previous business for the purposes of notice of termination and severance pay.

Violations of the ESA can result in compensation for the losses of the employee or reinstatement at their past position (if improperly terminated in certain circumstances), though the second option is uncommon. Common law legal principles can also apply if the dispute is brought to the courtroom. The common law legal principles are usually more generous to the employee than those within the ESA. For example, notice of termination minimums under statute are approximately one week per year of employment; whereas under common law the notice period can be well over a year; depending on a number of factors.

Human Rights and Equality

In Ontario there is strong support for policies that promote equality and discourage discrimination. Men and woman are entitled to receive equal pay for equal work within the same organization. Any violations in that respect can entitle the harmed party to a variety of restitutions, including salary readjusted or compensation through unpaid wages. These principles are supported by both the Pay Equity Act R.S.O. 1990 and the ESA.

Additionally, employees are entitled to equal treatment under the law without discrimination because of race, ancestry, place of origin, colour, ethnic origin, citizenship, creed, sex, sexual orientation, age, marital status, family status or disability. Protection from discrimination based on these grounds is conferred by the Human Rights Code R.S.O. 1990 (the “HRC”). The HRC protects employees from harassment in the workplace and employees from constructive discrimination. Claims under the human rights code are directed towards the Human Rights Tribunal which has the power to institute a variety of remedial measures.

Pregnancy and Parental Leave

Female workers are entitled to 17 weeks of pregnancy leave after 13 weeks of employment. Additionally, both men and women are entitled to receive 35 weeks of parental leave. During his or her leave the employee does not receive wages from the company but retains their benefits. Additionally, the employee on leave is entitled to 55% of their wages (up to $413/week) from the government employment insurance program. The employee on pregnancy or parental leave’s spot in the organization, or something comparable, must be made available to the employee on leave upon return.

Employment Insurance

Both employees and employers in Ontario are entitled to contribute to an individual’s employment insurance benefit plan. This is paid as a percentage of income. In the event of unqualified termination, layoff, maternity leave, parental leave or illness the employee is entitled to the saved insurance benefits.

Pension

Additional to employment insurance, employers and employees are obligated to make payments to the Canada Pension Plan (CPP) as well as implement a private pension plan whose minimums are provided by the Pension Benefit Act R.S.O. 1990.

Termination

Workers in Ontario are protected by statute against termination by the ESA. An employer wishing to terminate an employee without just cause must offer the employee either notice of termination or payment in lieu of notice. The ESA sets the statutory requirement of notice at one weeks notice or payment in lieu of notice for every year of employment up to eight weeks of notice or payment in lieu of notice. This minimum cannot be waived in an employment agreement or a collective agreement as outlined before as one of the features of the ESA. Employees who have been unjustly terminated and not provided “reasonable” notice have the ability to claim damages for their unlawful termination. The courts look at many aspects of the employee’s duties including the length of service and the entirety of the events leading up to the termination to determine what a “reasonable” period is. As mentioned before, a “reasonable” period is often construed by the courts to be much longer than the statutory period and can exceed a year.

Licensing & Registration

In order to start a business under a specific name you should first ensure that your proposed business name is not used by another company. Once you have chosen an approved company name you should register for a Master Business License. You may also need to register for a business number. A business number is required for paying HST, payroll or for importing and exporting, however, is not always required.

Many businesses require additional licenses or permits in order to operate legally in Ontario. The license requirements can be federal, provincial or included in the municipal code (such as in Toronto where business licenses are governed by chapter 545 of the municipal code) so it is important to search for the licensing requirements in the specific region. Furthermore, businesses operating without the required licenses can be subject to charges under the applicable bylaws.

A simple example of a business requiring a license is a business that sells alcohol in a bar or restaurant. In order to sell alcohol you must apply and obtain a liquor license. Further, liquor licenses are divided into two types, licenses for permanent establishments and permits for special occasion. Many businesses from street vendors to airlines must obtain licenses in order to operate. The government maintains a certain level of regulation on any business (the level depending on the nature of the business) and may require the business to maintain specific standards to obtain the required licenses.

Overall, it is important to be diligent and understand your licensing requirements which are necessary for your business to avoid fine, etc.

Real Estate

Along with the abovementioned licensing considerations, it may also be important that your business complies with real estate and zoning bylaws. There is an extensive list of regulations governing how retail space, for example, can be used, regardless of whether it is leased or owned. Your home, as a prime example, may not be a suitable location to operate a business. It is important to follow the zoning regulations where it can be possible to apply and change unfavorable zoning restrictions.

Purchasing or Selling a Business

Rather than starting a business from the ground up, it may be beneficial to purchase an existing one. Or on the contrary, there may come a time that you want to sell the business. There are a number of factors to consider and methods of organizing the agreement when buying or selling a business.

Primarily there are two methods of organizing the sale of a business. Both methods have different costs and benefits for both parties in the purchase.

One way to organize the sale is to have the buyer purchase the existing assets of the business. This can be beneficial to the purchaser who is then able to pick and choose which of the assets (and liabilities) it acquires.

Since the purchaser is acquiring each item individually it may be able to lower the taxes payable in the years to come through favorable assessment of asset purchase prices thereby allowing it to claim tax credits, etc. However, the greatest benefit to the purchaser is the ability to pick and choose which of the liabilities to assume. This would include the option of continuing the employment of the previous company’s employees and negotiating that the vendor be required to pay severance for those whose employment is terminated.

The alternate style of organizing the purchase of a business is to have the buyer purchase shares of the existing company. In this way the purchaser will obtain the prior owner’s interest in the company, including its assets and liabilities. There are a number of tax and liability issues that need to be considered with a lawyer and an accountant before proceeding. However, you need to keep in mind that when the shares of a corporation are sold the owner steps into the shoes of the prior shareholder and all assets and liabilities remain with the company unless negotiated out.

Both methods of selling or purchasing a business have their strength and weaknesses; however, you should speak with us to discuss how best to structure your transaction.

Privacy Law

The use of modern technology allow for industries to collect substantial quantities of information from a consumer and that information can be used for invasive functions, disclosed or used for inappropriate purposes. The Personal Information Protection and Electronic DocumentsAct, SC 2000 (“PIPEDA”) protects consumer privacy in the Canadian private sector, with exceptions for journalistic or artistic works. Though other provinces have specific legislation tailored for their province, Ontario is not one of them.

In short, the PIPEDA strikes a balance between the need of organizations to collect and make use of personal information and the person’s right to keep their personal information personal. Under most circumstances, the use, collection or disclosure of personal information requires the prior consent of the individual and notification of the specific uses. The uses must be appropriate to a reasonable person. There are only limited exceptions where prior consent is not necessary.

The PIPEDA sets out requirements for the organization once the information is collected. The organization must develop and implement a privacy policy (and some times appoint a privacy officer), implement the personal information management practices described in the PIPEDA, ensure that the information remains safe from unauthorized collection, be sure that the personal information is available to the one disclosing it and able to be modified. Finally, the organization responsible for disclosing information to a third party can be liable for the violations by those third parties.

The Privacy Commission of Canada (PCC) is responsible for overseeing the practices of organization with respect to the PIPEDA and the Privacy Act (though the Privacy Act is only relevant to government organization). Organizations that are suspected of violating the PIPEDA or have received complaints are subject to audit or investigation. Though the PCC itself cannot give binding orders it can refer the case to the Federal Court of Canada which has a wide range of remedial powers. Overall, the PIPEDA is administered by the PCC and ensures that businesses do not take advantage of their customers and use their personal information unlawfully and without their permission.

Consumer Protection Act

The Consumer Protection Act (CPA) applies to protect consumers purchasing throughout Ontario. Therefore, it is important for any supplier of goods within Ontario to have a grasp of the rules and regulations within the CPA to avoid a breach. It provides a set of statutory warranties, prevents false or misleading representations, prevents negative contract formation and requires that suppliers provide full disclosure in consumer arrangements. The terms within the CPA apply to many purchases or agreements made in Ontario and cannot be contracted out of. Damages as a result of violations to the CPA range from rescission of the purchase agreement to monetary fines.

Sale of Goods Act

The Sale of Goods Act implies certain conditions to protect the consumer when there is a sale of goods or services. There are a number of important provisions in the legislation, but we would highlight the following: Firstly, the seller must always be sure to have the right to sell the goods. Secondly, all items sold by sample have to correspond to that sample. Thirdly, the legislation implies a number of conditions to the terms of the contact; two of which are that the goods must be of merchantable quality and, if there is a stipulation regarding its intended use, it must be fit for that purpose. What is also worth mentioning is that, unless otherwise stipulated in the contract, the burden of delivering the goods is on the seller.

The Sale of Goods Act also protects the vendor. It establishes when the vendor should be paid and gives legal protection if the buyer refuses to pay for the goods. It gives the vendor the right to place a lien on the goods, the right to prevent delivery and authorizes them to resell the goods in certain situations.

Insolvency and Restructuring

If need be, corporate restructuring in Ontario is regulated by the Companies’ Creditors Arrangement Act (CCAA) or the Bankruptcy & Insolvency Act (BIA).

By way of a very brief outline of this complicated area of law, the BIA offers a set of rules and regulations in the event that a business has no money to pays its creditors. Immediately after filing for bankruptcy all proceedings against the bankrupt are stayed. All assets of the bankrupt are then vested in a trustee with the obligation of administering the claims process and satisfying the creditors as best as possible. Secured creditors often appoint a receiver (or allow the court to appoint one for them) to help them claim what is owed to the creditors. The plan to distribute assets must be given to the court for approval and, only once approved, can be voted for or against by the affected creditors.

Conclusion

This article only briefly touched the myriad of issues related to doing business in Ontario. We would enjoy the opportunity to assist you in navigating the challenges that you may face both before or after you have set up your business in Ontario.